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Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Expect the unexpected: How to get your finances in order

With around 80% of businesses failing in their first year of operation, how they structure their financial operations has a lasting impact on their ability to compete and deliver returns. Ross Greenwood, Nine Network’s Finance Editor, believes that so many businesses fail mostly due to poor financial planning and understanding. So whilst entrepreneurial flair and a great idea is the initial spark behind setting up a business, understanding the finances is critical to getting it past that first 365 days.

1. Get a solid financial platform

“It might seem an obvious task, but getting the right bank account and credit card facilities is vital unless you want to constantly fight against your future business growth,” says Ross.

“So many businesses have the wrong type of bank account, so write a checklist of what your needs are. For example, your business may need merchant facilities due to online transactions, or you may have a lot of cash deposits due to operating a services business.”

Then there is the way that the money comes out of your account. “You may need to pay creditors by direct transfer, or by cheque. Or you may even have to pay them by credit card, so consider this: choosing the right credit card facilities also gives you full and accurate reporting of your payments. The tax office now accepts credit card statements as proof of purchase, so bear this in mind.”

Doing a little bit of shopping around can save you money. Even a few hundred dollars a month adds up over the course of a few years, which can mean a lot if times become tight.

2. Cash flow is the key to business survival

Cash is quite literally the oxygen that enables a business to survive and prosper, and is the primary indicator of business health. Even if your company is profitable, it could still fail as a result of a shortage of cash.

Ross comments, “Whilst a business can survive for a short time without sales or profits, without cash it will die. For this reason the inflow and outflow of cash need careful monitoring and management. Here are some pointers for business owners and their cash:
• Manage your cash: set yourself and your banking up so you can be transparent and record how much money you need to come in to keep your business alive.
• Prepare a cash flow forecast and update your projections if there’s a change in market trends or your business fortunes, ensuring you plan for seasonal peaks and troughs. You also need to be aware of your total costs and obligations across the year: you might think you’re in a healthy position for the first six months, but have you factored in that big shipment towards the end of the year that could plunge you back into debts?”

3. Invest to save and grow

It might seem a little strange to advise you to invest when you’re discussing cost savings. However, some thoughtful investing in the right areas of your business (such as technology) can lead to greater cost savings in other aspects of the company at present and as your business grows.

Ross explains, “As a small business it can often be hard to judge what you might need in the future. You want your investments to grow with your business, which may mean outlaying some cost in the short term, but the long-term benefits are very rewarding.

“For example, with the Australian labour market so tight, mobile working is a serious consideration for all businesses. So what tools do you need to provide your employees to enable them to do their jobs? BlackBerrys, for example, are a great way for them to gain productive time throughout their working day, which in turn means lower labour cost (as well as more responsive staff). As a result, the cost savings you gain far outweigh the initial cost.”

4. Manage your credit

Make sure you’re conscious of how much your customers can pay, as they can turn into your worst nightmare. Find out what their payment trends are like. Do they pay cash or do they string out their payments for months at a time? You might be able to take the hit in a healthy economic climate, but if things become tight, keeping an eye on payments will go a long way to consolidating in times of unrest.

“Stalled payments can really affect your cash flow,” advises Ross. “Know who your customers are and what their ability to pay their debts is like. You have to be vigorous in getting those debts closed off, as it’s not uncommon for many of the biggest customers of small businesses to go broke or not pay”.

5. Make sure people know you’re in business

If you’re not marketing your business, then there’s a good chance that nobody knows you’re in business. “When times are tough, marketing budget is always the first to get the cut, and for a small business this can be the nail in the coffin if you’re still trying to establish yourself. You don’t have to spend thousands of dollars to buy customer contacts. Research your audience and find ways to get hold of email addresses to populate your database. Having a business blog is a good way to reach potential customers and gather their details, for example,” says Ross”.

6. The value of staff

“The thing that catches out a lot of small business owners is the minimum wage requirements, and not understanding the different industry wage classifications,” says Ross. “Remember also your superannuation obligations and factor those into the total cost of staff, along with basic workers’ compensation.”

Ross advises that you also need to think about the type of person you employ. “Australia is experiencing a tight labour market at present, and if people don’t work out, then the cost to your business is greater if you have to train and retrain people. Use the internet to source the right staff, as you’ll find  that it could save you costs and provide a wide candidate audience. Times might be good now, but staffing is one area that you should pay special attention to, so if bad times hit, you’re in a good position with the right people.”

7. Don’t sell yourself short – pay yourself some money!

Reinvesting back into the business and not forgetting yourself is perhaps the final, but certainly by no means the least important, part of running a business. Ross says, “Even if you’re truly entrenched in the business and cash is tight, try and pay yourself a salary. You are part of the cost of the operation of the business – so make sure you factor in that too. Discipline yourself and pay yourself some cash – you’ve earned it!”

Ross advises that if you follow the seven simple financial planning rules above, then you should have the foundations of a successful business. “Running your own business will make you greater returns than any other investment you’re likely to make in your life, if it is successful. Entrepreneurial flair is one thing, but having astute business judgment will bring you the rewards you crave,” concludes Ross.

Ross Greenwood
Business Insight, Spring 2008

 


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