Small business failure sucks! It’s a punch in the stomach! Not only does it affect the business owners and their staff but their families and often the wider community.
As a small business owner, you must wear many hats. With responsibilities varying from salesman to debt collector. You also need to keep track of where the cash is going and how the business is performing.
The accounting system is one performance tool to use. But accounting to non-accountants is confusing. There are too many rules, and it is too easy to misunderstand. Based on principles that create a distorted picture of your main reality — how healthy is the business today?
As a result, most SMB owners are too consumed with running the business to bother with the accounting.
But they are missing the important point in that the bookkeeping is only one of two distinct parts:
- The recording and summarizing, of the historical financial transactions of a company … is the bookkeeping.
- Then there is the analysing and interpretation of the business numbers to assess the present and use numbers to plan for the future … the management accounting or more importantly the complete financial management system.
The bookkeeping function is routine and structured and with modern accounting software and integrated applications, a growing amount of it can be automated.
Whereas the analysing and interpretation has challenges. As it involves a wider understanding, interpretation and consideration of the complete business.
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Here are some of the main financial management challenges business owners must deal with, and how they can overcome them.
Remember: Cash is king!!
1. Preparing for Disaster
The Covid-19 pandemic is an example of a natural disaster that had, and will continue to have, devastating effects on both businesses, jobs and lives. These natural disasters hit small concerns especially hard as in many cases the business is only a month or two away from financial collapse.
Very few business owners even consider these risks and have a planned disaster recovery strategy or plan.
Takeaway: The only guaranteed solution is to have an adequate “runway”. The available cash, to ensure that the business survives the disaster and is able to revive after the event is over.
2. Cash Flow
Managing cash flow is a critical task for SMB businesses. According to a U.S. Bank study, a whopping 82 per cent of businesses that fail, do so because of cash flow problems.
Small business owners find it difficult to allocate funds to both cover the running costs, provide themselves with a deserved income and provide for the guaranteed “rainy day”.
Takeaway: To stay on top of cash flow, you need to have a disciplined, routine system to manage the cash flow. Purposefully keeping costs as low as possible, finding the best deals and being relentless when chasing payments from customers.
3. Managing Business Risks
There should be a regular assessment of business risks. Asking questions like “What risks are covered by insurance?” and “What risks am I prepared to shoulder?”
Other risks include, is the business too dependent on one supplier or one customer? If it depends on imported products is there cover for a sudden currency devaluation or a sudden increase in costs? Is the business dependent on Google traffic for customers? Is there only one distribution channel?
Recent events with the China-US trade war, as well as decisions made by Amazon and changes to Google search algorithms are examples of this kind of vulnerability.
Takeaway: Assess and measure relevant risks and then take appropriate action to reduce or eliminate them.
4. Preparing for Taxes
Every business has to pay taxes. So prepare — know how much and when to pay these amounts. Put the cash aside so that it is available when due.
If your small business is home-based, ensure you know the allowed home office deductions for setting up and running your business.
Takeaway: Take advantage of all allowable deductions. Periodic consultation with a specialist tax accountant or updates from a tax advisory service will pay dividends.
5. Managing Payroll
Trying to be a payroll expert can be a waste of time for a small business owner. There are many rules and many rules which change over time.
According to a recent survey, more than half of the businesses polled stated that they could improve their payroll process. The most common problems relate to organisational inconsistency, including incorrect tax filing, over- and underpayments, tracking employee absences, compliance issues and the administrative burden.
Takeaway: The best (easiest?) solution is to use one of the many cloud-based payroll systems that are available in your country. These systems are up to date and compliant and often have well-qualified support staff to assist with any problems.
6. Controlling Expenses
There should be clearly defined processes that ensure that money is not wasted. Then when spent it is correctly and timeously recorded .
Dump as many paper-based systems as possible. Look for all opportunities to automate and digitise.
There are many accounting software and application options available on the market that can help you automate. Most of the software is similar, but if you have specific requirements, do some research and find the one that best suits your business’s needs.
Takeaway: There are many integration options for these programs and applications using an API (Application Program Interface) or apps like Zapier.
7. Reviewing Performance
The periodic closing of the accounts is easy if the records are complete and up to date. Make the routine processing of transactions in a tight time loop — what happened yesterday is ideally updated by today.
With the month-end financials finalised within a few days — 5 working days maximum — then all focus is on the current month!
Working with a tight time loop means that mistakes can be quickly identified and rectified. Getting over the hassles of “how can I remember what happened with that, it was ages ago”?
Include critical objectives and performance measures in an easy to review daily dashboard. This dashboard should also include customer and cash related indicators.
Takeaway: It’s critical to formally review the business performance on a monthly basis. Also there should be elements monitored weekly or even daily.
8. Analysing Financial Decisions
Making a sound financial decision can be done in three steps:
- evaluating alternatives and options and then
- defining the solution and making a plan.
Regardless of where the information comes from generating the numbers is only the first stage. What do those numbers actually mean? What are the assumptions? How can they be improved?
Changing assumptions and scenarios and then evaluating the alternatives and options should lead to the best solution.
Finally, the most important step is to finalise the plan and put it into action.
Takeaway: Small business owners often have a pages long to-do list but don’t achieve many of their to-do’s! The secret is to focus on a few items over a short period of time like 3 priorities in 90 days and then make it happen!
While accountants may believe that it is an important task for small businesses to select the right accountant, this is probably not completely true!
There is a need for an experienced tax accountant and initial advice on the initial set up of the financial management system like the bookkeeping and payroll packages. There is also a requirement for a good general business analyst or management accountant who can recommend and design all the other business systems.
On an ongoing basis, the small business owner will need specialised business support. This includes elements of specialised financial advice, as well as others like marketing, people management, sourcing and supply chain. Many of these can be one-off projects done either on-site or remotely.
The one overlooked, but essential support, is a “business partner”, a non-executive, part-timer (cheaper than full-time!). A trusted advisor to bounce ideas off, a mentor, coach and accountability partner. Someone to maintain business focus, facilitating the achievement of the agreed goals, and not forgetting the important but not urgent issues.
Making sure that the business does everything it can to adapt and grow in this rapidly changing world.