Financial Management is absolutely vital for success in business, to maximise business sustainability, productivity, and growth potential. Many small businesses quickly get themselves into dire financial straits and there is overwhelming evidence to suggest this will happen again!
Too many small businesses experience poor financial performance or worse, financial hardship that is massively expensive. Experienced Business Advisors often encounter businesses operating [unsuccessfully] in the fashion described above. This is completely avoidable with the use of experienced Business Advisors and Accountants.
Choosing an accountant who has gained experience and expertise working with small businesses, who understands your business, will go a long way to ensuring your business is more rewarding.
Financial management services should:
- involve the proactive management of all financial activities including sales invoicing, payroll, debtors and creditors, which directly impact on profitability and cash flow
- be an integral part of doing business to ensure a significant improvement in business performance
- provide an opportunity to make better and more informed decisions
- ensure a more timely flow of information to the business owner
- use online accounting systems to integrate with other add-on applications
- Increase Profit + Cash flow + Income + Working capital
- Solve all of your accounting headaches and deal with all Tax compliance
- Communicate with you frequently to keep you fully informed
- be customised to suit the needs of the business
- be engaged for a minimum of 12 months for best results
- Provide an affordable fixed monthly fee
- should be cost effective and affordable for most businesses
- include business advice, accounting, bookkeeping and tax
Success in small business requires quality advice based on sound financials, with no exceptions! However, the best advice available will take you nowhere unless action is taken.
Sure, marketing, sales, engaging and training the right staff are all vital and challenging issues but if you do not have a handle on your numbers, the rest is just academic.
Small Business Owners need to get their priorities right and ensure their financials come before social media!
How to become fully engaged in Financial Management
- Appoint a principal Business Advisor
- Appoint a Business Accountant
- Appointment a Business Tax Agent for tax returns and BAS returns
- Appoint a Bookkeeping service provider or ensure your own staff are sufficiently skilled
- Use Xero online accounting for all accounting requirements
- Sign a letter of engagement
- Agree a fixed price monthly fee
- Sign a Direct Debit Authority
- Commit to responding promptly to all requests and required actions
- Commit to being accountable for your actions and the outcomes you produce
- Commit to transition from working in the business to working on the business
- Financial management is essential to business success and sustainability
For many start-ups and existing small business owners accounting for small business can be confusing, with many accounting terms and small business financial statements not understood and it does not need to be that way – help is at hand.
Just ask us and we can clarify what the various accounting terms mean and how to understand small business financial statements, a must for any small business owner.
Financial Statements Explained
We can provide a quick and highly effective solution in just a 1-hour meeting with you so you start to understand financial statements and the powerful information they hold.
There are three small business financial statements you need to understand and review every month – easily printed out from your accounting program. We suggest you use XERO accounting and we can set this up for you.
The reports you need are:
Profit & Loss – Income Statement
This report is made up of two parts.
The trading account is – Sales less Cost of Sales = Gross Profit
This tells you how good [or bad] you are at making a profit on the sales of your product or services. This fundamental to your success. The Bench Mark for small business should be a Gross Profit of 50% – that is 50% of your sales should equal gross profit.
Sound high? Small business by its very nature will have low sales volumes. If the sales volume is low then it is a commercial reality that the gross profit must be high to be able to pay the bills and to pay yourself what you are worth.
The operating account is – Gross Profit – Expenses – Wages = Net Profit. This tells you how cost-effectively you are managing the business. The bottom line is that the Net Profit must be a positive number. Net Profit should represent a 30% ROI [return on investment] on the capital invested. Why? The golden rule in business is, you want back any money you have invested plus interest. A 30% return will give you your money in 3+ yrs which would be an excellent outcome. Net profit is also used to calculate the Goodwill Value of a business when it comes time to sell.
How do we arrive at these figures? Start with the end in mind – that is work backwards from the outcome you want.
Net profit required + your wage required + business expense = Gross Profit Required. Decide on the Gross Profit Margin required based on industry knowledge. Your Gross Profit divided by the Gross Profit Margin will tell you how much you must achieve in Sales. E.g. Gross Profit $150k ÷ 50% Gross margin = $300k in sales. Question is can you business achieve that?
The Balance Sheet tells you what the financial capacity of the business is. Assets less Liabilities = Owners Equity [the bit you own].
If you understand the balance sheet it shows you how money is available to the business and how you have used it to operate the business – there is a wealth of information here.
Statement of Cashflow
This report is all about timing – is there enough cash available to pay your staff, your creditors and you as and when these fall due. In very many cases the answer is no.
How do you get this all in place? You must have budgets in place.
I think you get the picture – if you do not understand this information or the information is not available to you, you need to talk to us fast about your accounting for small business financial statements.
If you would like to read more on this important topic Understanding Small Business Financial Statements
Seven Steps to Improving Cash Flow
Apply these steps to have an immediate effect on cash flow
- Ask for payment up-front
- Ask for a 50% up-front payment and the balance on completion
- Offer new clients the option of monthly direct debit payment
- Collect debtors early and pay creditors later
- Improve gross profit margins and lower operating costs so more net profit is retained
- Use pay as you go Cloud software programs with no upfront annual fee
- Where insurance premiums are significant, use the premium funding option
As always, it is a good idea to get professional advice early so you can quickly stop small cash flow issues turning into major cash flow dramas.