Over the past three weeks I have introduced the concept of benchmarking, which allows you to analyse your business against your competitors. Benchmarking takes financial figures from your accounting system and converts them into ratios, which allows you to compare your results to those of your competitors. These figures are usually expressed as a percentage of sales or profits, before abnormal items are taken into account.
Benchmarking is working ‘on’ your business rather than ‘in’ your business.
With this concept in mind, this week’s tip is all about improving your cash flow through effective financial controls.
Essentially, there are 6 finance-related areas to regularly examine in your business:
- Increase sales – everything starts with a sale. Without a sale there’s no business –it’s that simple. Remember, the 5%/5%/5% principle – 5% increase in sales, 5% decrease in cost of sales and 5% decrease in overheads. Multiply it out, you’ll be amazed by its effect on the bottom line.
- Cut costs – review the basic fabric of your business, can we recycle to save money and reduce waste, can we reduce our lighting costs, minimise telephone, photocopying and other administration related expenses. Can we save 5% per month or quarter. Measure it to manage it.
- Monitor cash levels – do you have sufficient finance or cash to continue operations for the next 6 months? Do you know your break-even point? Review cashflow and consult with your lenders. Cash is king. Profit is great, but never run out of cash.
- Implement procedures for Debt control – customers and staff have to be educated to understand and follow a clear system of payment and collection. Three of the most basic requirements – send your invoice immediately upon delivery of the goods or services, set strict deadlines for payment, (7 – 14 days is the best), and use a no-fuss invoice and hassle-free payment system.
- Implement processes for Credit control – take advantage of your own credit accounts with suppliers and avoid making early payments where they are not required. However, it’s important to stay in favour with your suppliers in case you really need to stretch your payments at some stage. Look at pay by month options for major expenses, e.g insurance.
- Review your financial position every week – this report should provide you with at least the following information –
- Sales to date and sales for the week,
- Expenses to date and expenses for the week,
- Current bank account position,
- Current accounts receivable, and
- Current accounts payable.
Running a lean business is what small business people do. Freedom is often the reason you get into business in the first place. So run a very lean business and take advantage of your manoeuvrability.
Over the next two weeks, we will continue to look at factors that impact on your cash flow, factors such as planning and management within your small or medium-sized business.
