While you may employ a chartered accountant to look after many of the financial aspects of your business, as a business owner you must also take a responsible and pro-active approach.
The reward will be a business that is more under control and responds when you pull the right levers.
Know your tax liabilities and make sure you can pay them
Taxation is one of the main responsibilities of running a small business and this is where problems often arise.
You should always ask your accountant to prepare the annual accounts and calculate your tax liabilities as soon as possible after the year end, and plan to have the money available to pay the taxes when they fall due.
Have a basic understanding of your financial accounts
It is vital you have a grasp of your business’s finances. Your accountant will have prepared the figures but you must be in a position to understand what it is that they are telling you:
• Has the business increased in profitability?
• What factors have contributed to any improvement or deterioration?
• What do the figures tell you about future trends?
Put together a forecast
It’s important that you have a view of how the business will perform in the current year. This means putting together a forecast, which can be amended to reflect changing factors or new plans.
If you have no major changes planned, forecasting may be just a case of predicting what your turnover (or sales) will be. Assuming no significant increase in overheads, the forecast net profit will be easily calculable.
Monitor your sales figures
Some businesses, such as those in production, will have an early indicator of business activity through incoming orders. This enables a manufacturer to anticipate future sales.
However many businesses, such as retailers, must monitor sales through the tills. Developing a picture of the sales and gross margins as early as possible, and comparing them with previous periods and your current forecast, gives a good indicator of performance. If they suggest an adverse position you must be prepared to act to correct it.
Keep costs under control
Costs fall under two main headings; variable and fixed. Variable costs are mainly purchase of products which are for re-sale, and fixed costs are independent of any business activity and include rent, rates, energy, insurance and marketing. Monitor these expenses by looking in your periodic (monthly or quarterly) management accounts.
Manage your working capital
Buying and/or selling on credit clouds the cashflow picture. Sales on credit result in a debt which the customer may take weeks to pay. The cash will go into ‘debtors’ in your accounts, so having a system of chasing up debtors is essential.
Stock levels also need to be controlled and monitored so that excessive amounts of money are not tied up in stock.
Remember: cash is king
Monitoring cashflow is the other side of the coin. Business owners frequently record the bank balance at the month end and check it against the previous month’s figures.
Not anticipating adverse cash moments can result in having to ask your bank for a short-term facility, which will not inspire confidence.
Have a system for monitoring key performance indicators
The key indicators for most businesses are sales, costs and working capital. The cash position is a quick and vital mirror of these figures.
You need to monitor sales, working capital, stocks, and costs as frequently as you can. Having monthly or quarterly management accounts prepared will confirm the business’ progress and provide a check on the accuracy of the performance figures.