Almost every week we see and hear of a business failing. We hear about the large companies and see many smaller ones fall by the wayside.Essentially, companies fail because of poor management, poor financial control and, in some cases, fraud.
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, meaning past, present and future.
Here are some suggestions for what you 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 this last year, now is a great time to start. Once you start measuring profit by income streams, you can maximise the strongest and work on or eliminate the weakest performers. At the very least, you have the information to make a decision.
Are there other streams of income you should consider? 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 do they stack up against 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 your costs 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.
How do they stack up 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. If you manage to make a profit, now you have to follow it up with good cashflow management. This requires a good understanding and close eye on what drives cashflow. The key components of good cashflow management are:
The very best way to handle cashflow management is to have a cashflow projection – a simple spreadsheet that plots out your expected income (taking into consideration time for customers to pay) and your expected outgoings.
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 cashflow.
You need systems and people in place to make it all work. Systems are freely available 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 track financially on a constant basis.
Sue Hirst, CFO On-Call