5 key financial strategies to keep your business moving forward
A business succeeds because the business owner is doing what they know best – their business.
Years of passion, toil and dedication goes into building a strong, sustainable and a successful business.
The idea of ‘being your own boss’ has always been the golden lure for anyone wanting to throw in their 9 to 5 jobs working for someone else.
Yet ask any business owner and they will tell you, running your own business is probably one of the hardest jobs they’ve ever undertaken.
Not only do you need to set up the business (business formation), you also have to find new customers (marketing), deliver/provide products and services (delivery) and manage on going customers/clients to ensure they are happy and give you referrals (client management).
A 2012 ASIC report into company failures showed that following strategic management failure, poor and incorrect financial management was the next biggest cause of business failure.
If a business owner is lazy or sloppy with their account keeping or does not spend the money to engage a professional to help them, they and business will eventually crash and burn.
On the flip side, spending too much time on the accounts, trying to get everything perfect at the expense of working in and on the business will also result in eventual catastrophe.
There is a fine line that needs to be trod – however, you can run your business successfully and stay on top of your finances and accounts by paying attention to these 5 key financial strategies.
Cash flow is really all about staying on top of your accounts receivable and accounts payable.
If you don’t understand these terms – then you need to!
In a nutshell, accounts receivables is money owing to you from customers and accounts payables is the money you owe to suppliers – put it simply, receivable = money IN, payables = money OUT.
This is a fine balancing act of paying what you owe and collecting what others owe you.
Some businesses find themselves in a dangerous cash-flow position after they've let their accounts receivable grow without proper management.
You'll feel like business is going great. Sales keep coming in, but your bank account tells a different story.
Don't just make the sale. Make sure you collect on it, too.
Remember – CASH IS KING.
Understand costs and the difference between gross margin and profit
Your business has limited resources by way of cash in the bank and access to cash, e.g. overdrafts etc.
It’s vitally important you understand where and what the money is being spent on – so many businesses don’t think twice about how much they pay for the raw materials they need to run their business.
If you are overpaying for your materials, remember, you need to pass this cost onto your customers and make a profit at the same time – paying too much just makes you more expensive – which could result in lost sales due to price alone.
In the accounting world, we use the acronym COGS - that stands for “costs of goods sold”.
And here’s the other area where business’ get themselves unstuck – not understanding the difference between Gross Margin and Profit.
If I sell you my product for $10 and it cost me $7 – my Gross Margin is $3 ($10-$7).
Gross Margin is NOT the same as Profit.
The business still has to pay other expenses such the running costs of the business, interest on loans and of course, taxes.
Profit is what is left over after ALL expenses have been paid – your Gross Margin may be positive. however, the business could have a negative Profit.
Key point - determine your true COGS and establish the right margin to remain competitive and financially viable to your own bottom line.
Timely, accurate and organised bookkeeping
Financial records and transactions are important.
Keep true and accurate records and pay attention to them.
If you don’t have the time to do it on a regular basis, then have your accountant do it or get a bookkeeper who is a certified BAS Agent.
Regardless of how you do it, you should personally understand where your resources are going.
It’s important that you be able to track every transaction down to the dollar (and ideally, to the cent).
Cloud accounting systems the likes of Xero and Quickbooks, have simplified the process.
Clear out ‘bad debt’
We know cash-flow for small-medium businesses can always be touch and go.
How can you provide your product or service without having inputs of some kind, e.g. inventory, raw material, tools etc?
And we know, more often than not, the easiest access to money is through your credit card.
And if left unchecked, credit card debt can pile up – at a very high cost – i.e. credit card interest rate.
Do whatever you can to ensure your credit report and debt position is as clean as possible and be sure to make your repayments on time every due date, if not earlier!
By doing so, you will demonstrate consistency and the ability to effectively manage your finances.
It may feel like a stretch at times, however, it’s only short term and your business will be better off in the long term.
If your debt situation is getting out of hand and you’re overwhelmed with pending payments, then seek the help of a professional debt consolidation agency – this may mean applying for a debt consolidation loan.
The last thing your business needs is a bad credit rating which will have enormous and restricting flow on effects.
Plan, Plan, Plan and Plan some more!
We’re all familiar with the old saying, ‘failing to plan is planning to fail’.
The trouble is many business owners just fail to plan.
The prospect of having to prepare a business plan and a cash-flow forecast is seen as just too hard.
Where do you start? What’s included and what’s not? How comprehensive should a business plan be?
Just the thought of these questions stops business owner’s dead in their tracks.
While there are no hard and fast rules as to how to put together a business plan, there are some fundamental requirements.
Typically, a business plan should include the following:
Business overview – who are you and what do you do
Target market – who are your ideal customers
Competitors – who are your major competitors
Point of difference – what makes your business different to your competitors
Marketing – what are the key marketing tactics for your business – remembering that what works for one business, may not work for yours
Financials and forecasting – include a 3 year (minimum) projection of income, expenses and profit
On the surface, this may seem like a lot to do just for a small business, yet, each of these categories need not be pages upon pages – for example, explaining who you are and what you do can be accomplished in as little as 3-4 paragraphs.
And a financial projection does not need your to be a wizard in Excel – you only need to include your revenues, costs of goods sold, any fixed costs (e.g. wages, rent, vehicles etc) and from all this, you can work out your profit.
A business plan and cash flow forecast are not only required by future lenders, yet they help you set out your goals and expectations.
This allows you to tweak your business as it grows. If the time comes where you require an injection of funds, these plans can also demonstrate that you are serious about your business.
You are more likely to have a bank or investor pour money into your business with a clear business plan.
Again, as with dealing with your debts, you may need to seek professional help in order to do it properly.
Once you’ve initially developed your business plan, it’s then only a matter of keeping it up do date on a regular basis, i.e. start of the financial year.
While there is a lot more to ensuring the financial success of your business, at least focusing on these 5 key areas may help your business to grow strongly or at the very least, stay above water.
For a no obligation consultation, call Aperture Accounting on 0469-235-269