This a guest post by Emma worden, see Emma’s details at the end of the article
The basics of taking control of the money in your business
It seems like more and more Aussies decide to give entrepreneurship a go. In fact, according to the most recent studies, there are 2.1 million small businesses in the country and this number is expected to grow even more. However, running a small business isn’t as easy as it may seem, especially when it comes to managing finances. So, if you’ve ditched your 9-to-5 job and started your own small business, you could use any help you can get. And that’s why we came up with 10 tips for better finance managing in your company.
Don’t mix personal and business finances
One of the biggest mistakes rookie entrepreneurs make is failing to separate their personal and business finances. This leaves them not knowing how well their business is doing and whether some changes in their operations should be made. So, if you want to be able to manage your company’s finances effectively, keeping a separate business bank account is an absolute must.
Manage your accounting
There’s no need to say that accounting is one of the most important aspects of being an entrepreneur. If this is your first time running a small business, chances are you don’t know much about accounting. In a scenario like this, hiring a good bookkeeper can be a real lifesaver. If you decide to tackle accounting yourself, investing in an accounting software can turn out to be an amazing idea.
Be aware of your day-to-day costs
No matter what kind of small business you’re running, you can’t survive in the market if you don’t have enough money to cover all of your day-to-day costs. We’re talking about costs such as your rent, wages and office supplies. Therefore, you need to be aware of how much money your business needs in order to keep operating and make sure you don’t go below this.
Know how to deal with taxes
If you want to be able to manage your company’s finances effectively, you also need to know how to deal with taxes. If you’re a small business with a turnover of less than $10 million, the company tax rate you’ll have to cover in currently 27.5%. Make sure you meet all the deadlines for filing tax returns in order to avoid fines and interest.
Apply for a loan on time
There’s no reason for you to wait too long before you apply for a loan that’ll help you grow your business. In fact, if you wait until your company is in a bad financial position to apply for a loan, chances are you won’t be able to receive financing at all. Therefore, make sure you turn to a company that gives fast business loans while your finances are still good.
Create an emergency account
You never know when things can go wrong, and having some money stashed away can be a real lifesaver. The best way to do this is to create an emergency account and move a portion of your monthly earnings to that account. The money you set aside can help you cover payroll during a slow season or allow you to replace equipment that broke down.
Collect your invoices
If you want your business to survive, you have to make sure you maintain a healthy cash flow. And this is something you won’t be able to do if your clients are late on their payments. The best way to deal with such clients is to hire experts in invoice collection. There are plenty of invoice collectors in Australia and finding a company you can turn to shouldn’t be too difficult.
Protect your data
Another important thing to have in mind if you want to avoid financial hiccups is that you need to protect all of your company’s data. This is the case because new mandatory data breach reporting laws came into effect in Australia. According to these laws, you could face a large fine in case an unauthorized entity comes accesses anyone’s personal information from your business computer system.
Don’t spend prematurely
One of the biggest mistakes you simply have to avoid is spending prematurely. This means that you shouldn’t go big on marketing, business cards and inventory until you’re 100% sure your business has what it takes to succeed. Spending too much on things like this can create a cash flow blockage, which is definitely something you need to avoid.
When running your own business, it’s quite easy to get sucked up in the benefits of business ownership. However, if your business is still in its early days, you probably can’t afford this just yet. Instead, what you need to do is set your salary as low as possible in order to save money you can spend on improving your company’s operations.
Have these 10 tips in mind and you might just manage to follow the steps of many Aussies out there and start a successful small business. Just bear in mind that even once you establish yourself on the market, looking for new ways to improve your money management is critical.
Emma Worden is a business manager from Sydney. She enjoys reading and writing on a business topic and giving advice and tips through her texts. If you want to read more of her work, you can find it at https://bizzmarkblog.com/
I believe the question about making money is even more important than the growth question because I have seen many businesses go bankrupt even though they were growing. Business growth only makes sense if you end up with more money in your bank account as a result. A business that doesn’t make profit and generate cash flow is a hobby.
So, these are the most important rules about making and keeping money in your business.
No profit, no business. So is profit is the Purpose of business?
John Mackey is the founder of a large international chain of organic supermarkets called Wholefoods Markets. The company has been highly profitable ever since John founded it in the early eighties and it has paid a dividend to its shareholders every year of its existence. Amazon purchased the company for untold billions of dollars and John Mackey is now one of the world’s richest people. John clearly knows a thing or two about building great businesses and about making money.
John Mackey also wrote a book however, called Conscious Capitalism and in it he says something that made the penny drop for me. He says this:
“Thinking that the Purpose of business is to make money is as silly as thinking that the Purpose of people is to eat food. We need to eat food, we eat food all our lives, and good food is better than bad food and without food we die, but eating food is not the reason we exist. We eat food so we can make good on our Purpose in life”.
John says it’s the same with business and money. The business must make money and profit and generate cash flow (and plenty of it!), but only so that it can make good on its greater purpose.
So, let’s be clear about that: making money is the means to an end, and without profit and cash flow, the business cannot perform its function.
Pricing: Someone’s going to be the most expensive, why not you?
Everyone can sell cheap. It takes no special skill or approach to sell cheap. It takes incredible skill and focus to be the cheapest, make a profit and be around for the long haul. Very few businesses can do so consistently. The only three I know of are Aldi, Ikea and Walmart. I’m sure there are others but they’re few and far between.
If you make low pricing your main differentiator and competitive advantage then you better be the most disciplined and focused business out there because there will always be someone knocking on the door undercutting you and you’ll constantly struggle to make enough money to survive, let alone build a beautiful business and life. Competing on price is simply a dog’s game.
Instead, ask yourself what you need to do to be the most expensive. Raise your prices and see what it takes to sell with higher prices. What else can you compete on? Remember, a beautiful business and life is so much easier to achieve with high margins.
20% Of your customers generate 80% of your profit. Who are they?
You might have heard of the Pareto Principle or the 80/20 rule. This rule can be applied in many situations, but there is no more appropriate topic than a business and its customers.
I can just about guarantee that if you were to run a report listing all your customers on a continuum with maximum profit and cash flow at one end of the scale down to least profit and cash flow (or even loss) at the other end, expressed in dollars, you will find there is a small bunch of customers at either end. There is a small group of customers who you make by far most of your profit from, and equally, there is a small group of customers who cost you most of your money.
The problem is that most small businesses can’t easily run a report like that, but I can tell you it’s worth spending some time figuring it out or buying the software that makes it straightforward.
You will be shocked when you find out how much effort gets wasted on customers who keep you busy but don’t make you any money. Equally, you’ll realise how urgent it is to give more attention to the customers who bring in the majority of your money (because they might leave if you don’t!).
The three C’s: Collect Collect Collect. Why does it matter so much?
I’ve seen many businesses make profit and grow yet struggle and even go bankrupt. The problem in those businesses is cash flow. It may seem obvious, but making profit is pointless if it doesn’t hit your bank account. You’d be surprised how often I talk to business owners who complain about never having enough money to pay the bills while having tens or hundreds of thousands of dollars in outstanding debts.
In my days as a builder, a recurring problem was not finishing the jobs to 100%. Sometimes for months, we’d leave a few defects outstanding because they were small and we had moved on to the next project.
However, that meant we couldn’t collect the final invoice, sometimes for months. In other businesses, I see that people finish the work, but wait until the end of the month or sometimes even longer before they invoice the client. Finally, most small businesses do not have a simple and consistent collection system.
These three factors mean that your business is functioning as a bank for your customers. Your money is in their bank account and it’s of no use to you there. You must then constantly rob Peter to pay Paul, you can’t take advantage of early payment discounts from your suppliers and when your business is in growth mode, the problem compounds exponentially.
It’s even true that you’re cheating your customers by not completing, invoicing or collecting. Your customers want nothing more than to have their work done quickly, and when the work is completed well, your clients feel they are in your debt, and they want to remove that feeling as soon as possible. With every day that passes, that feeling of indebtedness changes and if they don’t receive your invoice until a week or a month later, they’re actually not so keen to pay you anymore.
Profit and cash are not the same. What’s the difference?
As I mentioned above, many businesses fall over even though they make a profit and grow. I also mentioned the compounding problem of growth. Here is a super-simplified example:
Let’s say you start in month 1 with a bank account balance of $1,000. You sell $1000 worth of stuff this month and after expenses, you have $100 leftover. That should mean you are $100 better off at the end of the month than you were at the beginning.
However, if you’ve only collected $500 of that $1,000 in month 1 and the balance follows the month after, you’ll be $400 worse off at the end of month 1 than you were at the beginning. The bank account balance at the start of month 2 is now $600.
Now, if in the next month you grow 20%, sell $1,200 and make the same profit percentage (10%), you will have made a total of $220 ($100 plus $120) profit by the end of month 2.
We’ll assume that you collect at the same level (50% in the month and the rest follows the month after). So, the starting balance at month 2 is $600 plus the remainder of the collections from month 1, making $1,100. Deducting the expenses of month 2 ($1,080) leaves a balance of $20 plus collections for the month of $600, so your balance at the end of month 2 is $620. In other words, after 2 months of profitable and growing trading, you’ve gone backward by $380 – and that’s if everyone pays within payment terms. If only 5% of your customers are late payers, you will go back even further at the end of month 2 (and so on).
This is a highly simplified worked example, but it demonstrates the principle precisely. For this reason, in a growing business, you must give at least equal attention to cash and profit all the time. You could argue that cash is even more important than profit for two reasons:
You can continue to run a business as long as you have cash to pay the bills. There are many examples of big businesses that operated for many years without making profit, but who didn’t run out of cash (Amazon is one such example, Tesla seems to be another current example).
Profit can actually increase your cash stress because more profit leads to paying more tax and tax simply sucks cash out of your business.
Do you know your breakeven? Do you hit it four times every month?
One of the most important things I do with new clients is find their breakeven.
Breakeven is the number of dollars you must sell every month (or every day, week or year) to pay all the bills for that month. In other words, what does it cost to open the doors and turn on the lights? I find that the simplest way to establish your breakeven is this:
Look at last year’s profit and loss (P&L) statement and find the total of all the overheads, fixed costs, rent, insurances, electricity, marketing costs, subscriptions, etc. Add to this the monthly repayments of loans and lease payments. Now divide that number by 12. This is the amount of gross profit that the business must generate every month, 12 months of the year.
By looking at the P&L for last year (or any other representative period), you’ll be able to see what percentage of revenue your gross profit amounts to. For argument’s sake, let’s say your monthly overheads are $20,000 and that, in the past year, your gross profit has been 30% of revenue. Now we can find out how much revenue you need to make to break even by dividing overheads by gross profit to calculate revenue. In this example, it would be $20,000/0.3 = $66,666.00. In other words, based on last year’s figures with a margin for error and inflation of 5% added, you have to sell $70,000 of your products or services every month.
But that’s not the end of the story. In order to survive and actually break even, you must hit this number four times every month:
You must sell $70,000 every month.
You must produce $70,000 worth of goods or services every month.
You must invoice $70,000 every month.
You must collect $70,000 into your bank account every month.
If you miss out by even $1,000 on any one of those four in any month, you’ll have to make up for that $1,000 in the month after.
By introducing this simple discipline, your business and life will never look the same again. By the way, keep in mind that I’ve been ignoring profit in this topic. Obviously, you must make profit as well, but first you must instil the discipline of hitting your breakeven four times every month (at least!).
Numbers: How would you like to be in control of your business?
Finally, I always teach my clients how to put and keep their fingers on the pulse of the key aspects of the health of their business, every week and every month. The numbers. The KPIs.
The breakeven number I talked about above is obviously one of those key numbers, but there are more. Bank balance is a key number. So is gross profit and aged debtors. Then there are various financial ratios, such as the gross profit percentage and ratios like the “debtor days ratio” and the “liquidity ratio”.
Besides financial numbers and ratios, there are many other numbers and ratios in a business that you need to keep an eye on. For example, the number of enquiries in the past month, the conversion rate, average job value, the average sale, warranty returns, customer satisfaction… you name it!
A client of mine who has a furniture removals business knows that he needs to keep a keen eye on his removalist’s wages as a percentage of total sales. If he spends more than 60% of sales on the wages of his boys, he knows he’s not managed the work schedule well enough.
Your business will have its own specific numbers and ratios that can tell you a lot about the health of your business. I often talk about the mailboat report with my clients:
Imagine you are banished to a deserted island in the Pacific, without a mobile phone or email, and the only information you can get about your business is a single sheet of paper delivered by the mailboat every week.
What numbers would have to be on that single sheet of paper to tell you precisely what you needed to know about the health of your business, so you could send immediate instructions back with the mailboat?
All of the above probably sounds like common sense. And it is, there’s probably not a lot you didn’t already know. Profit and cashflow are not inherently complicated concepts to understand. But just like with dieting, we mostly know what we need to know to lose weight (but look at me!!), the trick is in the implementation. That’s where external support comes in and where I and people like me can have a valuable role and make a difference. I’ve written a lot more about coaching, mentoring and finding the right support in your business all through this website and you can download my Free Guide to finding the right coach by clicking on this link.