When it comes to running your business, financial management is the non-negotiable aspect to achieving your business goals. The planning and usage of funds within your business is vital to your business’s progress.
Ask yourself this question: Is your business where it needs to be when it comes to financial management or is it the one thing you know you need to improve to take your business to the next level?
Let’s break this down and go over the most important elements of financial management so that we can help set you up for success.
In order to feel (and be) in control of the finances in your business, it is essential to plan for all possible business scenarios – best case, likely and worst case. It’s important to always be one step ahead.
Have you calculated the minimum sales you need to reach your goals? During your forecasting exercise is when you need to know these numbers so you can build a clear pathway for the direction the business is heading.
Likewise, know your cost structure. Expenses do not grow linearly with income and therefore at different points of scale, you can be temporarily worse off and be caught completely off guard as you try to grow. e.g. Do you need another machine to continue to grow income?
Forecasting this capital expenditure (capex) and the capex as assets wear out is a compulsory forecasting area that you need to consider to make sure you set yourself up for growth in your business.
Scaling your business is often a goal that many businesses strive for as it can allow for rapid growth in your business. Failing to understand the solid financial management processes you need to have in place though to make that happen can become more burdensome than many businesses realise.
2. Debtor management
Does your see-sawing cash flow ever keep you up at night? Then rest assured there’s a way to fix this – start managing your debtors.
Consider the following ways you can do this, while remembering to maintain open channels of communication with your clients:-
- Shorten collection periods
- Make sure payment terms are clear
- Put in place easy-to-integrate processes for follow up
- Maintain clear credit limits
These are all important to limit your exposure.
Take for example, a client owing you $60,000 – or two months worth of a good sized construction project. You do not want to let this debt get out of hand, as a liquidation of this debtor can cripple a small business.
3. Financing – Principal Vs Interest
Most business start ups require new financing. An interest only loan may be acquired to promote cash flow. This can be really helpful for the early days of a business, because it facilitates cash flow. Don’t fall into the trap of using this in your budgeting though.- Budget for principal payments, and higher interest rates. Interest rates are at an all time low at the moment, but factoring in a significant increase (2-3%) in your cash flow projections will help to determine if the loan is serviceable in the future.
Your employees are a major resource to your business and wages and salaries will be the highest ongoing cost of operations. There have been a number of wage and back pay scandals in the media headlines in the last twelve months. So, if you’re in doubt, seek external help to determine the correct pay rates so you can make sure you stay out of the headlines.
Knowing the legal rate for your employee’s and the overall cost of each employee is critical. The Tax Office now requires businesses to be using Single Touch Payroll. In most instances, this requires payroll software, such as Xero. Talk to your Accountant/Business Advisor about setting up an easy to use software and the necessary training to get you started.
Paying tax may not be the most popular item on your to do list, we get that. Remember, though – you only pay tax when you make profits!
You need to factor in, and plan for:
- Pay-as-you-go withholding for employees
- Income tax on profits
Superannuation is another cost to business which is not optional. The ATO compliance in the super guarantee space is increasing, and with single touch payroll now mandatory, there is no excuse for not paying your super by the due date.
Other matters of Financial Management which will propel your business in the right direction include:
- Keeping accurate records in a timely manner – you can see where your business is at, at any stage of the cycle
- Talk to others in similar small businesses,
- Join, or create a networking group – small business owners can often feel isolated working on their own, share your problems and seek help.
- Utilise the services of a Good Accountant/Business Advisor. Make sure they help you stay compliant with the laws, stay on top of your cash flows and plan – so you can reap the rewards from your business and achieve all those exciting goals you have planned for your future.
When it comes to the financials in your business, do you feel you’re on top of them like you need to be to take your business to the next level? If not, we can help. We can walk you through it step by step to make sure you’re managing your finances correctly. Please reach out to your local Accru advisor.