With the sun coming out this is a great time of year to spring clean your business finances and make sure they’re on track to achieve your goals. The problem is you have so much on your plate you don't know where to start. The easiest way to start your Spring Clean is to look where the low hanging fruit is...identify where there are opportunities to make small changes that will make a big difference to your profit and cashflow.
These opportunities will vary from business to business, but may include price, profit margins, direct costs, overheads, inventory turnover and accounts receivable or accounts payable days. Once you have identified the factors that most influence your finances, measure your current results so you can see where improvements can be made. To help you get started, here are some spring cleaning tips for the five most common opportunities to review in your business.
Key Performance Indicators (KPIs)
Your KPIs record and measure the "heartbeat" of your business over the long term. Identify your KPIs and ensure that they are meaningful and then start working on improving the outcomes. Make sure you compare actual with the plan.
A budget is the foundation of any successful business, so it’s a good idea to review it at the start of each month and make sure it’s still relevant to your business and financial situation. Without a budget, it’s impossible to create KPIs and work out how you should approach the months ahead. If you haven't yet prepared a budget, start at the bottom line (profit) and work your way back up to the sales you need to generate that profit. Remember no budget equals no plan.
You should review your cashflow forecast at least once a month, to ensure you have funds available to pay bills, wages and any unexpected costs. Without a strong cashflow, you won’t be able to take advantage of last-minute opportunities that may make a significant difference to your business over the long term. Good cashflow management will give you confidence and security, even if your customers pay later than expected. Cashflow is the life line for every business, because without it you can fail.
Gross Profit Margin
The gross profit margin is one of the many KPIs of your business and indicates whether the average mark up on goods and services is sufficient to cover expenses and make a profit. Maintaining good profit margins means you can focus on quality customers, rather than pursuing high quantities of customers that offer low margins and cause your business to get caught in a discount trap. Keep tweaking your margins to achieve your desired outcome.
Many people don’t think of reviewing their customers when they’re spring cleaning their finances, but it’s often the cause of many financial woes. Take a pragmatic look at each customer and see which ones have been draining your time, energy and finances. Sort them by revenue, margins and how long they take to pay, then decide if it’s worth focusing on more profitable customers elsewhere.
Apply these 5 tips to your Spring Clean and start or continue building a more profitable business. Feel free to share your success with us.
If you need a hand identifying your key drivers and giving your business finances a spring clean, contact the team at Sullivan Dewing.