Why you need to create a business financial health audit checklist.
The viability of any business is its financial health. If you’ve been guilty of devoting all your time to working in the business rather than on the business, it’s time to take a step back and review the numbers.
It’s so easy to get caught up in the day-to-day work and the many, many demands on your time as a business owner. Customers, employees and suppliers are all important relationships to build and maintain.
Yet they can obscure the fundamental health of the business – sometimes until it’s too late.
This checklist is a good way to audit the financial health of your business and help you shore it up for a long and prosperous future.
1. Rightsizing your business structure
Some businesses aren’t suitably structured for their current situation. Which structure your business operates within can affect its tax status plus your rights and responsibilities as a director and/or shareholder.
Sole traders and companies are the most well-known structures, yet others exist, such as partnerships, trusts, co-operatives, joint ventures, and Indigenous corporations.
Growth over time may make businesses outgrow a particular structure; for example, when a sole-trader takes on staff or a private company goes public.
Business structure also includes property. Should you buy or rent your business premises? The decision has considerable cost, tax and investment implications.
For all these reasons, it pays to review your business structure.
2. Finance plans
A finance plan provides clarity over financial goals and strategies for reaching them.
And, while it may feel like you and your business are one, you are two separate entities. Hence, you need separate finance plans.
“Don’t overlook the power of the share economy to earn passive income.”
This will help you safeguard and track your personal finances independently of the business, which is important for various reasons – such as calculating tax liabilities, selling, or exiting the business, refinancing your home, taking on business partners and alternative investments.
Each plan should be built on the same five foundations:
- emergency fund
- spending and investments plan
- insurances/risk mitigation
- superannuation/nest egg
- estate planning/exit strategy.
You may also find it useful to revisit your business plan, ensuring operations remain aligned with your goals, market and purpose.
3. Funding/working capital
Interest rates have been a hot topic in recent months. Have you reviewed your business loans and other debts? What about your home mortgage – especially if it is security for a business loan or equity that could be reinvested?
You may reward your customers’ loyalty but, sadly, most banks and lenders don’t.
A good broker can help you refinance to a better deal. Also weigh up whether to purchase or lease new equipment, factoring in the purchase price, any borrowing required, and ongoing maintenance and repair costs.
4. Tax management
Chances are you have some form of savings to be gained or deduction to be made that you aren’t already using.
Do a depreciation audit; itemise every item you are eligible to depreciate, then check you are claiming the full tax deduction for each.
Review your personal expenses versus those of the business, ensuring you aren’t double-dipping (which may attract penalties) or paying too much tax by claiming through the wrong entity.
Keep your tax, wages and superannuation payments up to date, to avoid late penalties and to protect your cashflow – smaller, regular payments are easier to accommodate than larger instalments less often.
Double-check that wages and super are being distributed correctly.
Consider charitable donations, too – they may be tax deductible and support your marketing activities.
5. Staffing, incentives and rewards
With acute labour shortages nationwide, retaining current employees is a must.
Consider how you are paying, incentivising, and rewarding your staff. Do they feel valued? Are competitors offering more?
Pay is just one factor. Non-monetary benefits or rewards you could offer include additional training, appointments with financial advisers, accountants, massage therapists or meditation teachers, discounted benefits at other local businesses (gyms, cafes etc.), competitions, team-bonding events, extra annual leave, educational resources such as books – the possibilities are limited only by your imagination.
6. Risk mitigation
Cast a critical eye over your operations and see how well they would stand up in the face of an unexpected disaster or sudden market shift.
Among the gaps may be:
- Insurance: out-of-date policies, inadequate cover, policies with poor value for money or providers notoriously slow at paying out claims.
- Contingency plans: remote working processes, digital systems and website back-ups, emergency scenario strategies and a pre-determined roster for who implements them.
- Security: site access, cyber-security, password protections.
- Cash flow: identifying peak cashflow gains and drains, foreign exchange stop-losses, current inventory.
Be sure your review covers all operations, assets and cashflow.
7. Bring in money
Money in hand is worth more than money owed. Scrutinise your current means of banking the cash.
Invoices generally become harder to recoup the longer they have been outstanding – how earnestly do you chase them? How can you simplify payments for your clients – for example, by adding a ‘pay now’ button on invoices, automated reminders and payment plans?
Examine your product/service offering – are there gaps where extra revenue could be earned? What innovations can you bring to market? Are you fully capitalising on your USPs?
Also, don’t overlook the power of the share economy to earn passive income. Could you rent unused warehouse, office, retail or parking spaces, vehicles or equipment?
8. Charge what you’re worth
Pricing should reflect not just what you offer, but the value you provide.
You may offer the same product or service as Jim or Jane down the road, but if your offering has greater value for the customer, you potentially could charge more to reflect this.
Added value could be additional perks, faster delivery, more in-depth service, or superior qualifications and experience.
Also examine what is selling well or poorly. You may be losing revenue potential by retaining products or services the market no longer wants.
9. Be ruthless on costs
It takes money to make money. But how much of your spending is really needed or delivering full value?
Common sources of waste include:
- Unused or underused subscriptions
- Unbudgeted social media advertising
- Poor value utilities, insurances, loans or services
- Technology and software.
10. Look after yourself
Review costs regularly to ensure you pay only for what you use and get full value from.
Investing in your business means investing in yourself.
Poor health – physical, mental or financial – has many flow-on effects, including absences, poor decision-making, distractions, low productivity, and higher medical bills.
Maintain a good diet, regular exercise and sufficient sleep. Allow yourself a break or holiday to recharge.
Pay yourself fairly and regularly – wages and superannuation – to extract value, safeguard your personal finances, and diversify your retirement assets.
And don’t go it alone. External input will ensure everything remains on the right track. So, check in regularly with your tax adviser, mentor or business coach, financial adviser, and your doctor, too.
This article first appeared in issue 39 of the Inside Small Business quarterly magazine
