Is your business running smoothly?
23 June 2020
You would be surprised by how little some business owners know about their business. Many do not know simple facts such as what their monthly overheads are; a crucial piece of information that can mean the difference between business success and failure.
Staying up to date is one of the most important factors in keeping your business running smoothly, and profitably. Each month, take time to check the following matters that are key indicators of your business’ health. With a clear understanding of your position, you will be able to make the right decisions to run a robust and profitable business.
- Monitor Cash
Cash needs to be closely monitored as it is the single most important indicator of business performance. With cash it is imperative that it is monitored more daily than monthly. It is also important that it is monitored on both a short-term and longer-term basis.
- Financial Reports
Too often businesses react to information months down the track. It is imperative that accurate reports are prepared on a monthly basis, close to month end.Most software can provide reports – from large business with fully integrated programmes to small businesses using Xero. Having timely reports allow you time to react in real time to market changes.
You must understand your customers - continually ask them what they want and what they think of your product or service. Use technology to help you connect and measure with them.
Knowing your monthly overheads allows you to know when you have reached your breakeven point in the month and you start to make a profit.
- Key Relationships
Strong relationships are fundamental to business success today. You need a bank manager who will give you their direct dial number and you should make a point of keeping in touch with them. Likewise strong relationships with key suppliers are imperative. Suppliers are often willing to extend payment terms or give discounts and allowances so constant communication is the key. Huge benefits can flow to your business including improved margins and support through tight cash flow periods.
- Gross Margin
You need to know your pricing model and continually strive to maximise your margins. Gross profit and margin are key financial indicators that need to fall out of your monthly reports. Only by understanding your model will you be able to strive to improvements.
- Stock Control
Where stock is key to your business this needs to be measured on a monthly basis to obtain accurate financial reports. This doesn’t necessarily mean monthly physical stock takes but you should have a programme to monitor levels, ageing and shrinkage. Often rolling stock takes and spot checks are used. In my experience when money runs out, stock is often the culprit along with debtors.
- Debtors and Creditors
You must monitor your debtor levels monthly. It is important to measure the days outstanding and have formalised methods of collections. This often requires continuous follow up and a firm consistent approach. Likewise you need to measure your creditor’s levels monthly. Huge gains can be made by using technology and managing creditors on line and eliminating cheque payments.
Great employees are the key to business success. You need a process for collecting all the great ideas your employees have. You also need to monitor staff turnover on a monthly basis.
Often the difference between a dream and a goal is a plan. Businesses should have both short and long-term budgets. At a minimum you should be reviewing your monthly results to budgets. Again most software easily accommodates budgets.
If you’re stuck or confused about any of these matters, ensure you get professional advice sooner rather than later as staying up to date is fundamental to good business. Lisa Townshend is a Tax and Business Partner with BDO Napier, part of the BDO New Zealand network of independent Chartered Accounting and Business Advisory member firms.