Monitoring your business's vital signs could quite possibly determine whether it survives or not. Sue Hirst explains.
I see, hear and witness almost every week failure of businesses around us. I read about the large companies, and also see in our travels many other smaller ones fall by the wayside.
Companies fail essentially due to poor management, poor financial control and in some cases fraud – a la Hastie Group.
If this is the plight of big businesses, what chance do small businesses have to avoid financial failure or mediocrity?
The answer is to have your ‘finger on the pulse’ of your finances, which means, past, present and future.
Here are some suggestions for what business owners/managers need to know:
How does it stack up against your budget or target?
If you didn’t have a budget or target last year, now is a good time to start one for this year. There’s an old saying ‘If you aim at nothing you will reach the target with amazing accuracy!’
Which income streams performed best? If you didn’t measure it last year, now is a great time to start. Set up your accounts to enable this from 1st July. Once you start measuring profit by income streams, you can maximise the strongest and work on or eliminate the weakest performers. At least you have the information to make a decision. Are there other streams of income you should consider and are they viable? Get a Financial Controller to work it out before you proceed. Can you better utilise existing resources to maximise income e.g. can labour, equipment, space etc. be more productive? Are there innovative ways you can create other revenue streams e.g. internet sales? Can marketing and sales be improved to create greater volume?
How about your budget or expectation in terms of percentage of income?
If you didn’t have a budget or idea of what they should be, now is a great time to start measuring it this year. Managing and minimising your costs can have as much impact on your bottom line as big volume increases in income, because every dollar saved goes straight to the bottom line. If you don’t know what your Costs should be, a good place to start could be your industry benchmarks. These will give clues as to what to expect. Google ‘business benchmarks’ to find yours, or speak with a good Financial Controller who can guide you.
How does your overhead compare against your budget or expectation in terms of percentage of income?
Just like Costs, overheads need to be managed and minimised. Ask yourself of every line item on your Profit and Loss “Is this overhead necessary and how can I minimise it?” In a ‘price conscious’ and competitive environment, management of costs and overheads can be your only way of making a profit. Check your percentage of overheads against your industry benchmarks to see how you compare.
This naturally follows on from the above.
If you manage to make a profit, now you have to follow it up with good cash flow management. This requires a good understanding and close eye on what drives cash flow.
The key components of good cash flow management are:
- Plenty of profitable income
- Constant management and minimisation of Costs and Overheads
- Pricing for profit – if you’re able to increase prices Do It! If you have to discount be sure to understand the impact on profit.
- Efficient collections from customers – don’t be a bank for them
- Good management of stock – enough to sell but not too much to waste working capital
- Good management of jobs – finish them quickly and best quality possible
- Utilising all credit terms from suppliers and increasing where possible
The very best way to handle cash flow management is to have a ‘Cash Flow Projection’. It’s a simple spread-sheet that plots out what your expected income will be (taking into consideration time for customers to pay) and what your expected outgoings will be. As well as income, it includes any other funds into the business, such as loans, tax refunds etc. Outgoings also include items such as loans, tax, dividends etc. These are important to take into account as their timing can have a big impact on cash flow.
Systems and Resources
To achieve all of the above you need systems and people in place to make it all work. Think of modern on-line systems that are freely available today to help you efficiently manage all of the above.
On top of systems you need people who understand how the finances work in a business. If you employ a financial controller, or have a good accountant who has the time and expertise to delve deeply into your ‘day to day’ financial management, that’s great. If not, you need someone on your team who can keep things on the ‘right track’ financially on a constant basis.