Financial

When I worked in corporate, as a General Manager, I had a great team around me. I had:

1 Financial Controller
5 Accounts Clerks
1 Operations Manager
5 Area Managers
1 Executive Assistant
1 Human Resources Manager
3 Admin Assistants
20 Store Managers
11 Assistant Managers

When I started my own business, I had a store manager, an assistant manager, myself as the accounts manager, myself as the HR manager, myself as the admin assistant…and you get the picture. Small business owners typically perform most of the admin and executive roles for their business, whereas in larger organisations, there would be specialised people performing these roles, as per my example above.

The challenge is when we perform all the roles in the business, we are expected to be the expert, yet quite often we don’t have any expertise in this area.

In my opinion, this is where many small business owners fail. Taking on a role for the sake of cost control can sometimes cost more money than it saves. Smart small business owners take the time to understand each area of the business at a macro level, ensuring they know the ‘need to know’ details, but hand over the critical tasks to the expert.

When it comes to finances, there are a number of aspects that all small business owners must know, these include:

The Profit and Loss Statement (P&L)
Cash Flow Statement
Key Performance Indicators (KPIs)

Because every business is uniquely different there is no point taking you through this in great detail. Below, we will take a macro look at the above three points. I do recommend, though, that you book some time with your financial advisor to get your head around these points.

The Profit and Loss Statement (P&L)

The P&L is a report that shows your income, expenses and whether you have made a profit or a loss. The report can generally be run on any time period. You should definitely be reviewing this at least monthly AND you should know how to personally pull this report from your accounting system. The P&L generally looks like this:

Income:

Sales of X $10,000

Sales of Y $10,000

Sales of Z $10,000

TOTAL INCOME: $30,000

Cost of Sales:

Purchases for X $ 2,000

Purchases for Y $ 2,000

Purchases for Z $ 2,000

TOTAL COST OF SALES: $ 6,000

Gross Profit: $24,000

Gross Profit Margin 80%

Expenses

Expenses for A $ 1,000

Expenses for B $ 2,000

Wages $ 6,000

Rent $ 5,000

TOTAL EXPENSES: $16,000

TOTAL PROFIT / LOSS: $ 8,000

Total Profit Margin: 27%

The P&L is broken up into:

Sales Income – anything that is income to the business
Cost of Sales – anything that directly relates to the sale
Gross Profit – the difference between income and cost of sales
Gross Profit Margin – the ratio of gross profit to total income
Expense – any other remaining expenses that are not a cost of sale
Total Expenses – the total of all expenses
Total Profit or Loss – the positive or negative amount remaining after deducting expenses from gross profit
Total Profit Margin – the ratio of profit to total income

When you review this monthly, ensure you discuss with your accountant what aspects you can effect in the business. When you understand the aspects you can influence, you can increase profitability. These items become your KPIs.

Cashflow Statement

Understanding your cashflow in and your cashflow out, and the timing of each, is critical to small business.

I have owned up to nine retail businesses and, as is typical with retail businesses, there is high cashflow, but low margins. There were weeks when we were turning over well in excess of $100k, and yet, there were also weeks when we were spending more than $100k. It was therefore very important to know how much was coming in and when, and, likewise, how much we needed to spend and when.

I found this worked exceptionally well with my retail stores. However, with service-based businesses where you are invoicing clients, you may find the cashflow tools within Xero or Intuit QuickBooks Online will serve you better. There are also plenty of apps available to connect with QuickBooks and Xero.

The fundamentals of the cashflow statement are:

Estimate when you will be receiving money:
In retail this may be what days you bank (or banking is collected by your security company)
If you invoice clients, use your accounting system to help predict when client payments are due
Estimate when you will be spending money:
Bills
Payroll/wages
Rent
Tax
Super
Work out when you can pay the bills, etc.:
Some payments can wait, some can’t. Work out which bills you have some flexibility with. For instance, you need to always pay your payroll, super and taxes, but some suppliers may be more lenient with your credit terms. Communication is the key, always communicate that you may be late with a payment, as suppliers will be more understanding and not get concerned that you are not going to pay them.
Update your cashflow regularly:
Always update before making large payments
Update using your bank balance

Use your cashflow to plan out weekly, monthly and quarterly, as a minimum.

Key Performance Indicators

It is important to know what the key metrics in your business are − what drives sales, what drives profitability? Many business owners fail to even understand what the costs of their sales are, and yet wonder why they are not making money.

Your KPIs can vary greatly, depending on the type of business you are in, so it’s a good idea to speak with your financial advisor to find your good starting point.

According to American Express, the most common KPIs are:

Accurate sales figures are the first indicator of business trends. Whether they’re increasing, decreasing or flat lining, they provide a clear indication of where your business is heading. But they must be monitored in conjunction with bottom line performance, as well. Many small business owners become too top-line focussed and take false comfort in knowing that sales are growing even though margins may be shrinking.
Cash flow forecasts. You should calculate your cash flow forecast on a weekly or monthly basis; more often is better, especially during a ‘growth spurt’.
Debtor days outstanding. This is the average number of days it takes for your customers to pay your invoices. The calculation goes like this: accounts receivable/sales multiplied by 365. A decrease is a positive sign, while an increase is an issue, as it will affect your cash flow and your ability to keep your creditors current.
Creditor days outstanding. This is the average number of days it takes you to pay your suppliers. The calculation goes like this: accounts payable/purchases multiplied by 365. This figure needs to be monitored in conjunction with your debtor days as, ideally, you would want the number of creditor days to be equal to or higher than your debtor days. If it’s lower, you need to improve your debt collection, reduce your customer’s credit terms or negotiate better payment terms with your suppliers to avoid cash flow problems. This is one of the critical disconnects that can cripple a small company.
Inventory days or stock turnover. This is the average number of days the inventory you produce or purchase remains in your warehouse or on your shelves before you sell it. The calculation goes like this: inventory/purchases multiplied by 365. The lower the number, the better for your cash flow, which ultimately allows you to grow your business and expand your customer base without straining your resources. Inventory that’s ‘collecting dust’ is costing you money without a return and may be stale, obsolete or have been ordered in excess of demand. You need to carefully monitor what’s moving and what’s sitting and, most importantly, understand why. Stay close to your customers and meet often with your sales team to analyse and discuss any inventory that’s stuck on your shelves.
Gross profit margin as a percentage of sales. The percentage indicates the price you charge your customers against the prices your suppliers charge you. An increase is generally a very good key indicator, but a breakeven number or a decrease should alert you that there are flaws in your business model, that overheads are too high or prices are too low.
Profit before income tax as a percentage of sales. Ideally, this figure should increase, though a flat line may be acceptable for a period. A decrease, on the other hand, may be a warning sign of further potential losses.

Once you decide on the critical three to five numbers that will determine the success or failure of your business, begin to review and digest them on a daily basis, just as you do your morning coffee or vitamin regimen. These numbers should be shared, depending on your culture and leadership style, with others in the company who must also manage to them and should be the basis for daily huddles, brainstorming and longer-term strategic planning. These numbers can also form the basis for employee-level rewards and bonuses to help you drive business growth and the achievement of your business goals.

Resources

The first role I filled in my admin team was for bookkeeping. I believe that a business owner needs to get their head out of the account, and think about the bigger picture. Looking at the accounts at a macro level allows you to make high-level strategic decisions. Having your mind in the micro matters and individual bills keeps you thinking small. Compared to when I first started in business, there are now some fantastic outsourced options for bookkeeping. Upwork or Freelancer are great online outsourcing options for accounts. Outsourced solutions can work part-time or full-time on your bookwork and allow you to have the basics done for you. If you are utilising this option, you should still have an internal accountant or external financial accountant review and complete BAS and tax requirements. In Australia, you must be a registered tax agent to work on and submit BAS and other tax, so make sure you are complying with all required state and federal laws.

As we have grown, we have resourced ourselves with an accounts manager in our office and supported them with admin and accounts support through Odesk. The same way, I alone was reviewing the high-level information, now my accounts manager does it. This allows them to work on important and high-value tasks, rather than have their head in the bookwork.

Another great resource for small business owners is a part-time CFO. Companies such as CFO On Call provide a part-time solution for having a CFO. The benefit of this is that they are very strategic in their thinking, as opposed to retrospective. Your financial accountant often looks historically at your figures, as opposed to guiding you forward. It is important to have the right people guiding you at all times.

As a small business owner, planning is crucial. If you want to grow your business to enable you to lead the life you choose, you need to resource your business so it can achieve growth. Plan your business growth and have a clear understanding of the resources it will take to manage and achieve this.