financial tools

In this the 2nd part of a two part episode, Lisa will give you several tips to improve cash flow in your business from the payment or cash outflow side of your business.

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Show Notes

Entrepreneurs know that one of the most critical aspects to running a healthy business is to maintain a good level of cashflow.  In this the 2nd part of a two part episode, Lisa will give you several tips to improve cash flow in your business from the payment or cash outflow side of your business. She also explains how using some of these tips together can help build momentum and improve your cash over time.

Key Points

*Working with the terms your vendor offers you opportunities to improve cash including using the amount of days given as well as any early payment discounts that may be offered.

*Lisa discusses ways to negotiate with vendors to improve payments terms as well as managing payment methods to stretch out cash payments without incurring additional fees.

*Cash flow can be affected by decisions made surrounding inventory management and a few tips and stories were shared in this area.

*Lisa shares how investing in a resource in the purchasing area can help improve cash by monitoring activity and coordination in the spending area.

*Tips were shared how cash outflows can be managed in expenses like payroll and large purchases like equipment as well as the owners own pay.

*Lisa describes how she believes that the tips provided in these two episodes can help build upon one another and create an improved cash flow for a business.

Resources and Links

25 Ways to Improve Cash Flow Tip Sheet – Subscribe to Lisa’s newsletter, Prescription for Success to get the tips sheet and get information tips and strategies to run, lead and grow a healthy business.  Follow this link to sign up and get the tip sheet!

Other episodes referenced in this episode:

Learn about the money rollercoaster in the very first episode of Healthy Business Healthy Profits – What Makes a Business Healthy?

If you’d like to talk with Lisa about this or any business problem you’re having surrounding your growth then you may want to set up a Quick Care Consultation session her.  Check out more about that here

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Prescription for Success

Get all the updates and information Lisa shares from Business Rx and the Healthy Business Healthy Profits show! You’ll get information, tips and strategies on growing a healthy successful business. Don’t worry, I won’t bombard you with emails.  At most, you’ll get something from me every few weeks. You can sign up  Here

Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

Cash collection is an important part of any business but especially one that is growing. Listen to learn tips on collecting your cash in your business.

To listen to the episode hit the play button.

To download the episode, right click on this link  and choose Save Target As.  Go to the folder where you want to save the recording on your device and click Save or Enter.

Make it easier to get upcoming episodes by subscribing to the show on iTunes . Subscribing to the show will automatically download the episodes on your preferred listening device so you can listen to them when and where you want. And hey, if you like what you hear, please leave the show a great rating and review while you are there on iTunes.

Show Notes

Cash collection is an important part of any business but especially one that is growing.  Many businesses rely on cash to fund their growth.  In this episode, we’ll talk through all the aspects of the cash collection cycle and highlight the mechanisms and processes that help entrepreneurs maintain cash flow.  We’ll also discuss areas where things can breakdown and give tips on the types of processes that can help avoid those problems.

Key Points

*The cash collection cycle can vary among different types of businesses.

*Companies that rely mainly on credit cards can avoid many of the steps in the collection process because they have credit card companies perform those steps for them.

*Accepting payment direct from customers creates additional steps that companies must take to ensure payment.

*We touch briefly on the problems small businesses face from credit card and online payment services in the areas of chargebacks and fees.

*Lisa explains internal process steps on both the collection side as well as the pre-sale approval side.

*For repeat customers, credit standing also needs to be monitored to watch for customers who fall behind in the payments and processes need to be in place to react to those situations.

*Once an order is approved and shipment takes place, processes need to document the shipment and create an invoicing package to support the billing to the customer.

*Process steps in this part of the cash collection cycle are designed to create a valid, approved transaction as well as a documented shipment to help create the invoice package.

*An invoicing package should contain all the elements of the transaction – approved order, customer credit check and documentation of shipment – invoice.

*The next steps in the cash collection cycle is the actual collection of the cash payment on the account as well as the monitoring of the Accounts Receivable Aging Schedule to make sure customers don’t fall behind in their payments.

*The final step of the cash collection cycle is the proper handling of cash and ensuring that it is deposited into the bank and properly accounted for in company books and records.

*Lisa closes the discussion with tips about segregating duties inside your company to minimize the opportunity for misappropriating cash by your employees.

*Entrepreneurs need to keep in mind that this cycle needs processes that create checks and balances to safeguard cash and to also minimize the time to collect cash.

Resources and Links

Entrepreneur Magazine article Lisa mentioned in the episode –  Think You Can’t Win Against Chargebacks? Think Again.  by Joe Keohane

Have questions about cash collection and management in your own business, get in touch with Lisa for  Quick Care Consulting Session using this link

Note: Links in this post may be affiliate links.  Lisa Roberts is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.

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Prescription for Success

Get all the updates and information Lisa shares from Business Rx and the Healthy Business Healthy Profits show! You’ll get information, tips and strategies on growing a healthy successful business. Don’t worry, I won’t bombard you with emails.  At most, you’ll get something from me every few weeks. Sign up  Here

Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

An expense analysis is a tool to help monitor, control and manage expenses in your business. Learn more about it in this episode.

To listen to the episode hit the play button.

To download the episode, right click on this link  and choose Save Target As.  Go to the folder where you want to save the recording on your device and click Save or Enter.

Make it easier to get upcoming episodes by subscribing to the show on iTunes . Subscribing to the show will automatically download the episodes on your preferred listening device so you can listen to them when and where you want. And hey, if you like what you hear, please leave the show a great rating and review while you’re there on iTunes.

Show Notes

You often read in the business news how companies are taking on cost control projects or have cost reduction projects as a strategy in their business.  These companies are focusing on improving operations and financial results.  In order for them to focus on these areas they use tools such as a cost or expense analysis.  In this episode, we talk about using an expense analysis to get insight into your costs and how to use it to take action and make improvements in your business.

Key Points

*Expense analysis is a best practice that companies use to review costs, understand the changes in those costs and the overall impact to the company.

*Benefits of the tool include helping business owners get clarity about costs, understand the impacts of the various types of costs and provide a basis to begin to benchmark results.

*An expense analysis creates a basis to develop cost control or reduction strategies as well as provide a sense of control for the entrepreneur about his company and cost structure.

*Growing companies are realizing increasing sales as a result of growth. However, expenses are growing too and can spiral out of control.

*Companies can find cost savings in direct and indirect ways and we explain what that means.

*Once you identify problem areas, you can then begin to research why things are not in line and how you can take action to correct them.

*Problem areas lead to decisions and actions that create opportunities to improve processes and systems that can take costs out through time savings leading to money savings.

*Your accountant plays a key role in analyzing expenses but cannot be the sole driver of this and Lisa explains why.

*Lisa provides examples from her own experience of ways companies have used expense analyses to save time and money.

Resources and Links

Need advice on how to get started with expense analysis and cost control in your own business?  Set up a Quick Care consultation with Lisa Roberts to help you get started controlling and monitoring costs in your business. Follow this link to learn more.

 

Note: Links in this post may be affiliate links.  Lisa Roberts is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.

Sign Up to Get Updates

Get all the updates and information Lisa shares from Business Rx and the Healthy Business Healthy Profits show! You’ll get information, tips and strategies on growing a healthy successful business. Don’t worry, I won’t bombard you with emails.  At most, you’ll get something from me every few weeks. You can sign up  Here

Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

One reason your business is cash poor could be that you’re not managing the elements of working capital.  Listen to find out more..

To listen to the episode hit the play button.

To download the episode, right click on this link  and choose Save Target As.  Go to the folder where you want to save the recording on your device and click Save or Enter.

Make it easier to get upcoming episodes by subscribing to the show on iTunes . Subscribing to the show will automatically download the episodes on your preferred listening device so you can listen to them when and where you want. And hey, if you like what you hear, please leave the show a great rating and review while you are there on iTunes.

Show Notes

In this episode we will talk about the concept of working capital.  We’ll help you understand what makes up working capital and why you need to pay attention to it.  We’ll also give you tips on how to manage it better so that you are maintaining healthy levels for your business.

Key Points

*Working capital is a key element of liquidity that businesses need to fund operations and maintain momentum as it grows.

*Working Capital is current assets less current liabilities.  An asset or liability is current if is due within one year.

*Failing to watch and manage working capital can lead to potential problems of not paying its bills or meeting its obligations.

*While growing businesses are increasing sales, they are usually increasing spending which increases the pressure on working capital to stay ahead.

*Being profitable doesn’t necessarily mean that your business is free from potential working capital issues.

*We look at who in the company needs to be responsible to watch working capital.

*Lisa discusses the key positions in most businesses that have a role in impacting the elements of working capital.

*Entrepreneurs can help educate their team on working capital and how their decisions impact the company and its liquidity.

*Lisa gets into particular tips in managing and improving working capital on both the asset and liability side of the equation.

*One way to measure how you are doing in this area is to compute the working capital ratio.  Lisa describes how to calculate it and use it to monitor your business.

Resources and Links

Note: Links in this post may be affiliate links.  Lisa Roberts is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.

If you would like to contact Lisa for advice about working capital in your own business follow this link to request a Quick Care session.

To learn more about managing one of the elements of working capital be sure to check out this episode on Cash Flow Forecasting.

Sign Up to Get Updates

Get all the updates and information Lisa shares from Business Rx and the Healthy Business Healthy Profits show! You’ll get information, tips and strategies on growing a healthy successful business. Don’t worry, I won’t bombard you with emails.  At most, you’ll get something from me every few weeks. You can sign up  Here

Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

Key performance indicators are a great way to focus in on important areas of your business to gauge results, set goals and target improvement areas.

To listen to the episode hit the play button.

To download the episode, right click on this link  and choose Save Target As.  Go to the folder where you want to save the recording on your device and click Save or Enter.

Make it easier to listen to upcoming episodes by subscribing to the show on iTunes . Subscribing to the show will automatically download the episodes on your preferred listening device so you can listen to them when and where you want. And hey, if you like what you hear, please leave the show a great rating and review while you are there on iTunes.

Show Notes

Owners of growing businesses are so crazy busy that they rely on their gut too much and struggle with where to focus their valuable time. Determining where the business is doing well or doing poorly takes more focus and less gut. Entrepreneurs need a way to get information on business performance and get it quickly.  One way to get that information is using Key Performance Indicators or KPI’s. In today’s show we are going to focus on what KPI’s are and how you should use them in your business to help you set and measure performance goals as well as manage your business.

Key Points

*Key Performance Indicators or KPI’s can help you get a snapshot of how your business is performing in particular areas whether financially or operationally.

*KPI’s can help not only manage your business but also target areas of improvements you want to make in your business and gauge their success.

*It’s important to use KPI’s to understand your business against your industry peers and to pick the right metrics that, for your industry, defines success.

*Measures that may be important for one industry may not be as important or even irrelevant for another indusrty.

*Key factors to consider when choosing KPI’s for your business should be that they are relevant, meaningful and be able to lead to decisions and ultimately action.

*A good set of KPI’s can be used to set goals and objectives for your business to drive improvements both at the overall company level as well as the management team’s department level.

*Goals and strategies related to improvement initiatives can trickle down and create engagement for your staff.

*We discuss how the entrepreneur begins the process of identifying her own Key Performance Indicators and if she needs help doing it, the type of people and skills that can help her.

Resources and Links

Note: Links in this post may be affiliate links.  Lisa Roberts is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.

The True Measures of Success by Michael J. Mauboussin in the Harvard Business Review. Find that here

Key Performance Indicators – Information and Tip Sheet – sign up to get the tip sheet here

To contact Lisa Roberts to set up a Quick Care session to review your business and get started with your own KPI’s follow this link

Sign Up to Get Updates

Get all the updates and information Lisa shares from Business Rx and the Healthy Business Healthy Profits show! You’ll get information, tips and strategies on growing a healthy successful business. Don’t worry, I won’t bombard you with emails.  At most, you’ll get something from me every few weeks. You can sign up  Here

Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

Mid-year is halftime for your business.  A good time to review results to see how you’re doing.  It’s also a good time to adjust your game plane if necessary.

Think about halftime of a football game. To some degree, everyone involved is analyzing, regrouping and recharging for the second half. Fans in the stadium are chatting up their team’s great plays and analyzing any missteps so far. The commentators take a break from announcing the action to analyze the first half and offer opinions on how each team needs to play in the second. In the locker room, the teams are resting, getting hydrated and recharged so they can get back out there. Based on their analysis, the coaches are directing the team about what they need to do for the rest of the game to win.Mid Year review halftime

Business owners should make use of their halftime too. Back in December’s Post Year End Planning, we talked about planning your goals, budgets and action plans for the upcoming year. With mid-year approaching, you should schedule some time reviewing how you and your team are performing against your financial and operational plan.

What’s the Score?

I trust that you’re keeping your books updated and you’ll be able to produce and review your six-month profit and loss statement and balance sheet. How do the financials look? Are your sales on pace for the year? Are your expenses in line? Is the business profitable? Do your important financial ratios look in line? Halfway through the year is a good time to analyze your numbers to determine the health of your business.

While small business surveys have fluctuated in recent months, optimism for small businesses is generally higher than it was four years ago. While many businesses see some growth, there is still uncertainty on the horizon.

So how do you feel? Now is a good time to analyze what is going right and what is going wrong. If your business isn’t hitting the sales targets, are there things you can do to regroup and refocus your efforts? Are your expenses coming in higher than expected? Can you adjust so you can maintain expenses and build more profitability? How’s your cash flow? Do you need tighten up your cash management plan?

Review Your Financial Playbook

Your budget is much like a financial playbook and it can help you manage your business’ spending more effectively. Don’t forget to review your actual results against the budget to make sure that you are managing your money effectively and staying on track. That goes for both the sales and expenses.

The craziest and most frustrating argument I’ve ever had as a financial controller was about a 6-month budget to actual analysis. The argument was with a colleague heading up a division. His sales for the first 6 months were off by 75% but he still thought he should be able to spend 100% of his expense budget. I said, “Ah, no! You see, there is this little thing known as profit.”

Sometimes you have to review, regroup and, every now and then, readjust your spending when the circumstances change from what you had originally forecasted.

The Operational Game Plan

Six months into the year is also an ideal time to really review and analyze your annual operational game plan – the goals and plans you made for your business back in December. The projects that you undertook, are they complete? If they are long term, are they on schedule? If you had plans to hire more people, are you focused on those recruiting efforts? Did you have plans to improve an area of your business? Are you focusing on that or is it something that you’ve let slide over the last few months? What changed? Is it still inefficient and needs to be fixed? Are you making sure that your staff remains focused on your operational priorities and guiding them when needed?

Another recent survey, listed time management as the #3 most identified thing that keep business owners up at night (#1 was generating new sales and #2 was expenses eating into profits). If you’re in a time crunch, can you figure out what the problem is? Are you focusing on the most important things in your operations? Maybe there are things you can delegate to free up some of your time. Are you trying to do everything yourself when someone else could easily take over that task?

Management guru Peter Drucker said, “Time is the scarcest resource of the manager; If it is not managed, nothing else can be managed.” Use your own halftime to analyze the tasks and the time you are spending in your business and find ways to manage your time more effectively to spend time on your business.

“Don’t give up at halftime. Concentrate on winning the second half.” – Paul “Bear” Bryant.

Take advantage of your business halftime. Take a step back and analyze your “play” in the first half, regroup and recharge so that you can focus your energy to hit your numbers, maintain focus on your operations and achieve your goals.

Now go out there and win one for the _______________ (enter your business name here)!

And have a great second half!

Generating Cash Flow

As the economy continues to struggle and credit remains somewhat tight, managing your cash flows is taking on greater, if not, critical importance in survival of your business.  Managing cash flow is an important activity to ensure that you are generating more cash than you are paying out and thus avoiding taking on too much debt to finance your operations.  In a moment, I’ll share a key performance indicator that you can use to monitor one aspect of cash flow, but first a little background.

One of the first steps to maximizing your cash flow is to clearly understand how cash is generated in your business. Then you can identify areas where you may be able to improve your cash conversion cycle.  The main sources of cash inflows in a business are the sale of goods and services, investment and lenders.  Your business may acquire cash through investment in the business or from loans and lines of credit. However, the largest source will be from sales.   To be successful in your business, you must ensure that those sales are converted to cash as quickly as possible to accelerate cash flow into your company.

Extending Credit

The ways in which sales are converted to cash may depend, in part, on the type of business that your company is engaged.  A business to business (B2B) relationship will have to make some different decisions when compared to a business to consumer (B2C) relationship.  The main difference is that a B2B will almost always be forced to extend credit on account, where the B2C will not unless it chooses.  The B2C company also has the luxury of relying on credit card companies to absorb some of their credit risk.

A business can never completely eliminate credit risk, but building a good credit and collection policy will help to minimize this risk.  Once you establish a good credit and collection policy it is important that you adhere to it and monitor it.   There are some very good articles written to assist you in setting up a good credit and collection policy so we will not go into that here.  Once you have policies in place you must monitor your results closely.

Key Performance Indicator for Cash

One key performance indicator that will help you to monitor your cash inflows from credit sales is called Days Sales Outstanding or DSO.  The DSO key performance indicator or KPI will indicate the average number of days it takes the business to convert credit sales to cash.  The formula to calculate your DSO is as follows:

Total Outstanding Account Receivable divided by Total Credit Sales for the period being analyzed. Next, multiply that by the number of days in the period being analyzed to arrive at your DSO. 

 

A higher DSO will indicate that you have a potential problem in collections and a lower number will indicate that you are converting sales into cash effectively.  Here is an example for illustration: Assume total receivables of $1,100,000 and sales of $5,365,000 and a period analyzed of one year.  Your DSO would be 75 days which says that it is taking 75 days, on average, to turn your credit sales into cash.

Monitor Your DSOs

Over time, businesses monitor their DSO to detect changes that may be adversely affecting their cash flow. As you review your own DSO’s, you should look for trends either up or down.  A good trend is a declining DSO while an increasing trend is troubling for your business. For example, if your business sells on account at net 30 days and your DSO’s are at 75 days, this suggests there is a problem in your credit and collection activities and action should be taken. Furthermore, if you are required to pay your own bills within 30 days, it will become a much larger problem for your business as this gap widens.

If your DSO’s are trending up, there are a few areas to investigate and questions to ask.

  • Is the credit and collection policy being implemented and adhered to consistently?
  • Are you ensuring that customers establish their creditworthiness? Do you perform credit checks or keep limits lower until they prove they are creditworthy?
  • Do you bill customers in a timely manner?
  • Are you using an aging schedule and tracking past due accounts closely?
  • Do you have certain slow paying customers that are contributing to the trend and are you sending dunning letters or contacting them to follow up on past due invoices?
  • Are you following up with past due accounts to ensure that the shipment was received and correct?
  • Is the economy changing and having an adverse effect on customers’ ability to pay?

By answering these questions, you will be able to assess the reason for adverse trends in your DSO’s and formulate actions to improve the situation and ultimately improve your cash inflows. Take steps to improve your cash inflows, it could be the difference being in business or being out of business.

Over the last few years, the uncertainty in the economy and in business has been a challenge for weak companies as well as strong ones.  These challenges should have taught us that having a budget, monitoring results against it and being in a position to react to changes are extremely critical. A business tool that helps many companies manage operations is the use and controlling of budgets.  Many view budgets as a way to control costs and that is true; but it also can be used to monitor revenues as well.   Having an early view of revenue and sales trends can provide timely insight into managing costs. After you have thoughtfully put together your annual budget, you must monitor it closely so that you can make modifications in your business as events and financial results warrant.

To control your budget, consider using the following steps to understand where you stand financially as well as gain information to form the basis for decision-making and action in the future.

Have a Good Understanding of the Facts and Figures

To effectively develop and use your budget, you need to understand the basis behind the numbers. This includes the assumptions used to formulate those numbers.  This will be critical in quickly identifying any changes in those assumptions as money is expended in your budget.  You also need to recognize the difference between controllable and non-controllable costs.   A rise in taxes, commodity costs, and fuel prices may have an adverse effect on your budget by causing overages in your personnel, materials and delivery cost in your business. Unfortunately, you may not be able to control these costs and your budget will take a hit. Conversely, you may be able to control cost such as office supplies, advertising, or travel and entertainment.  Understanding the assumptions behind the numbers will enable you to identify what actions you may be able to take in anticipation of a change in costs.

Monitoring and Early Warning Systems

Once you have a solid understanding of the figures in the budget, set up a system of monitoring actual costs against the budget on regular basis to recognize the early warning signs that your numbers may be off track.  By reviewing the figures monthly, you will be able to catch signs of trouble in your business sooner rather than later.  Your review should also include revenue items as well.  If your sales are off track from what was forecasted, this may mean there is a problem with your products, your sales process or your marketing efforts.

Study Variances

Monitoring your budget will pinpoint variances from your actual results to your planned numbers.   The variance may be a negative variance in which you spent more than you budgeted.  A positive variance will indicate that you have underspent the budget.   Once you identify the variance, investigate the cause.  A negative variance may indicate a one-time unavoidable expense or that a negative trend is developing that may require action.  A positive variance may be good because a cost has come down or it may indicate trouble because something was missed.  For example, positive variances may be an indication that a critical project was missed, a key position was not hired or that important marketing plans were not executed.

Take Corrective Action

After you have identified the variances in the budget, take action to determine options for corrective measures.  It‘s possible that a budget item must be changed as in the case of rising cost that was not anticipated or controllable.  For some variances, you may need to take action to bring the cost back in line with the original budget.  In these cases, you may need to take steps to renegotiate with vendors, cut costs elsewhere, or delay expenditures or projects.

Running a business poses many challenges not the least of which is some level of uncertainty.  Limit that uncertainty by managing your business using these steps to control your budget.

How Well Are You Managing Your Business Finances?

Sometimes business owners get so caught up in managing the day-to-day in their business that they forget some of the basic things they can do to effectively manage their finances in a healthy way.  When I have conversations with business owners, one of the things I try to find out is whether they are managing their finances and cash flow effectively.  Those conversations go a little like this:

Q. How is your profit?

A. Ok, my sales were up last month.

Q. Great! But I asked how your profit level was?

A. Oh, well I don’t know my books haven’t been updated in six months.

Q. Ok, well how is cash flow then?

A. Not great, I am having trouble paying my bills because my customers aren’t paying on time. It’s causing problems for me and my business but I don’t know what to do about it.

And so it goes, business owners living in the moment, managing day to day, and not taking steps to run a healthy business.  There are some common mistakes business owners make managing the financial aspects of their business.

Don’t Make These Mistakes Managing Your Business Finances

heart stethescope finances health

1. Not Using the Information Right in Front of You

The best information you have about your business is in your own books.  The books tell you how much you sold, how much you spent, what is left in profit, how much cash you have, how much cash you owe and how much cash is owed to you.   If you don’t keep up with this information, you only know part of your financial picture.  You are losing the valuable opportunities to analyze results, determine real profitability and manage cash flow. You’ll also have difficulty identifying problems in your business.

2. Ineffective Cash Flow Management

This is one of those critical areas that can make or break a business.  Cash flow becomes even more important for a growing business, since the investment in growth typically occurs before the rewards of that growth are realized.  Like the old adage says, “You have to spend money to make money.”  In many small businesses, cash flow is the lifeblood that keeps you in business. Most companies need to build cash reserves to finance future growth.  Larger businesses have credit more readily available.  A smaller business sometimes needs to finance its own growth, thus making cash flow management a very important factor in its ability to expand.

3. Ignoring Receivables

Getting paid, sounds easy, right?  Not always. Too many late paying or non-paying customers can choke your business.  While this discussion could fit in the cash flow section, it deserves additional emphasis. Collections, collection policies, timely follow-up with customers, steps to reduce exposure, and other techniques are important to ensure that you get paid on time and keep cash flowing into your business.

4. Using Credit Effectively

No one in their right mind would finance a house with a credit card; you would never pay it off with interest rates that high.    Using the right type of credit for your purchases is essential to good credit management. The type of credit a business uses for short term cash needs like inventory should not be the same as the credit facility it would use to purchase a new expensive piece of equipment or longer lived asset like a new building.  If you need to use credit to finance part of your business, work with your lender or advisor to make sure you are using the right credit for the situation.

5. Not Measuring Your KPI’s

I have talked to business owners who thought that they were doing well, only to show them that they could be doing much, much better.  If your books and financial statements are current, you will be able to calculate key ratios for your business.  KPI’s are key performance indicators and while there are some that are fundamental for all businesses, some may be more important than others for your own business.  Determining and measuring what makes your business successful through your own KPI’s will help you take action when needed. KPI’s like profitability, inventory turnover, average collection periods, gross margins, productivity ratios and host of others will help you target  inefficiencies in your operations. They can also highlight opportunities for improvement and cost savings as well as other ways to increase profitability.

 

Take some time to step out of the day-to-day chaos and look at the bigger financial picture.  Avoid these mistakes and you will be on the right track to managing, improving and taking control of the financial health of your business.