How can I have a financially healthy business?
If you’ve owned a small or medium business, you’ve probably heard the horror stories. The business that seemed to be turning a profit but couldn’t pay their bills. The business who lost their biggest customer and couldn’t get enough new sales to make up the difference. The business whose key employee left and took the bulk of the knowledge with them.
Any one of these incidents can leave your business bleeding—or gushing—funds with no way to staunch the flow. In many cases, a quick death seems to be the only option. So how can you prevent this from happening to your business? What steps can you take to ensure you have a financially healthy business?
1. Plan and forecast!
Spend time to plan out how your business will operate. How will you pay your staff and suppliers? How will you collect payment from your debtors? Will you pay for everything upfront and expect the same from your customers, or will you provide and request credit for a certain number of days?
Your business may seem to be doing well in terms of profit, but cash flow can be a hidden trap for many businesses. There’s no point in turning a profit when you have no cash to pay your day-to-day bills! Use 3-way accounts, which show you the health of your business financials based on your Profit & Loss (P&L), Balance Sheet (B/S), and Cash Flow Statement. Your accounting software should be able to provide you with all three.
Forecasts, too, are valuable as they show you what to expect going forward. Look for software that can use the previous year’s P&L and B/S to forecast your finances and cash flow in the coming year.
Beyond the financial side, you should also be looking for tools to manage stock and inventory, invoicing, payroll management, and marketing. It’s important to have an overview of every aspect of your business and plan ahead based on the data on hand.
2. Monitor your expenditure
When things are going well with your business, it’s easy to pay little attention to overhead expenditure. Marketing, supplies, utilities, staffing—these are just some of the areas where it’s easy to let inefficient spending slip through. When a business hits hard times, however, the difference between efficient and inefficient expenditure can determine if that business sinks or swims.
You should constantly check the returns on each major area of expenditure. Is the money spent well, or is it disappearing into a mysterious black hole? Are there any processes you can automate? Any cuts or changes you make in the good times will be one less you have to do in the bad. And you may find yourself with extra capital for expansion!
3. Manage risks and plan for contingencies
One of the biggest causes of business failure is when unexpected circumstances hit, and the business is ill-equipped to cope with them. There is no plan in place, no back-up funds, no processes to get the business through.
There are many areas of risk that need to be managed, from staffing, to inventory, to finance. At the very least, you should have business insurance to protect your income. But there are plans and processes you should put in place for items such as:
- General business operation and management
- Disaster recovery
- IT system maintenance and management
- Knowledge transfer and spread between employees
- Short-term cash shortfalls
- Corporate governance (board of advisers)
A professional accountant or financial adviser can also provide an objective look at your business and point out the weaknesses you need to shore up. Some advisers can also help you prepare bank documentation to present your business in the best light when applying for loans or lines of credit.
Running a small or medium business can be hard. It can keep you up in the early hours of the morning, worrying about not only its future, but yours as well. If, however, you plan and forecast, monitor your expenditure and manage your risks, you will have a business that is able to weather the storms of an ever-changing market.
This was written in collaboration with Intuit. Find out how Intuit QuickBooks Online can help your small business succeed by visiting their website.