Set sail on your new financial strategy

Is your business doing well?

Do you have your finger on the financial “pulse” of your enterprise? By the way: That’s not your accountant’s job. The fear that many business owners have around financial management is that it is difficult, complicated and mysterious. And many academics would have you to believe that this is the case. It’s not.

Simple Strategy

Effective and strategic management of your business finances is straightforward and simple.

The challenge is often more in establishing the routine and habits of a good financial manager. The reason most small businesses fail is because of poor accounting practices. In other words, the owners have never taken the time and planning to do what a wise owner should do: regularly take account of the revenues and expenses, the cash flow, and the budget forecasts. It does not require a degree in accounting or an MBA, but the basics must be in place and practiced!

Start Off Right

Too often, business owners start their ventures by mixing their personal money with the business funds. This is a dangerous practice and one that can cause you to unknowingly “embezzle” from yourself. If you have not done so already, completely separate your business money from your personal accounts. And resist the temptation to pay for business expenses from anything other than your business account. Regularly reviewing your Income Statement (Profit & Loss) is crucial. If you are a cash-based business you might get by with simply tracking your company’s checking account statements, but to be a truly effective “financial manager” of your business, you should establish a set routine of reviewing and analyzing your Income Statement at least monthly. Along with the Income Statement you should become intimately familiar with your Cash Flow statement. Again, if you are a strictly cash-based business this might be somewhat redundant, but for most business models this is critical. You should know the state of your cash flow at all times, especially in the start-up phase of your business. Once you have established the practice of monitoring your profit and loss and your cash flow, you will know how much money you are actually earning, your profitability, and the stability of the cash coming in and going out of your business. You can sleep better and you can make wiser decisions based on your knowledge.

Death and Taxes (or Death by Taxes!)

Most business owners are not killed by paying taxes (though it may feel that way), but by not paying them. It is the unpaid or unfunded taxes that often cripple a new business. And it is a pattern of striving to avoid business taxes that can hobble and even endanger the financial health of a business. According to financial expert Dave Ramsey, “If you don’t keep up with your taxes, that alone will close you down. If you are in a product business where you collect, and deposit, VAT and you “borrow” that (VAT) money to operate, you will fail. If you have employees and don’t deposit the proper amount withheld from them for taxes (PAYE), you will fail.” If you have not already, it is in your best interests to create a business “tax” savings account strictly for your payment estimates as required by SARS. Calypso Accounting communicates these figures to you on a monthly basis and is included in your monthly Management Pack. It is in this area where an ounce of prevention can be worth far more than the time and effort it may take.

Take Control of Your Future

It is not enough to simply have your Auditor or Accountant provide you with an annual profit and loss statement for tax purposes. And it’s not even enough to review and analyze your P&L monthly. While this is crucial and necessary, it only tells you what happened – it tells you where you’ve been, but not where you’re going. Calypso Accounting’s monthly interaction with our clients, takes the Management Pack a step further. Creating and using an operating budget is analogous to having a financial roadmap, a business “flight plan,” if you will. It guides you to where you want to be and alerts you to what lies ahead. Zig Ziglar said, “If you aim at nothing you will hit it every time.” With a forecast laid out in advance, a year if possible, you not only have a clearer path to follow, but you can be intentional in your planning and preparation, and able to develop options. Along with your account manager, you will be able to review your actual income and expenses against those budgeted for and analyze variances. Setting clear and achievable financial goals, such as net profit and revenue targets, forces you to develop the strategies and processes needed to achieve those goals. A budget does not simply serve to maintain a financial status quo, but serves as a profit-generating tool and financial planning tool.

3 Steps to Reinventing Your Financial Manager

While there is much more involved in successfully managing the financial operations of any business, there are some fundamental steps that must be taken for all business owners:

Step #1: Captain my Captain

Too many business owners make the mistake of purchasing equipment, vehicles, property, etc., with little more justification than “credibility”, or worse, for tax write-offs. Expensive software is another common expenditure that is often made with little forethought or without real need. Start-ups should especially be fanatically intentional and strategic with their spending. Managing your company’s money as if you were managing it for someone else can cause you to think long and hard about expenditures and questionable purchases. Cash is the lifeline of your business. Be a wise steward of what you gain and keep as much as you can.

Step #2: Avoid debt (as much as possible)

Business debt is seen by some as a necessity and a tool. There is another school of thought which subscribes to business striving to be debt-free. Regardless of your own thoughts on acquiring debt, the indisputable fact is that what is often seen as a “cash flow” problem is usually a debt problem. A business with no debt, by definition, has more cash than an identical competing business with debt.

While using debt in the short term may help with immediate cash flow, this long term strategy will position you for success.

Without debt, companies have the wherewithal to survive. Having debt automatically puts a business at risk. And for smaller businesses, that risk can be fatal.

Step #3: Save money

Along with avoiding or getting out of debt, you need to save money. Retained earnings represent far more than simply an “emergency fund” or cash cushion. In addition to emergencies, they can be used for investing into your business and for capitalizing on opportunities. One of my clients was recently presented with an offer to purchase a competing firm. While his strategic objective stated a substantial growth over the next five years, this opportunity would allow him to achieve the same growth in one acquisition. Fortunately for him, he had been putting a percentage of his net earnings aside as retained earnings. When the offer was presented, he already had the needed cash to buy out his competitor and more than double the size of his business!

Make it a Priority

Establish written systems and procedures in order to make sure that you and/or your financial controller are consistently following your financial management practices. If you make strategic financial management a priority, you will find that you can maintain the financial stability you need despite the ups and downs of the economy. And you will find that the vision you have for your business will become a truly achievable objective.

If you need help setting course to a new financial strategy for your company, contact us today on (012) 665-5653, or send us an e-mail to [email protected].

Make sure to “like” our facebook page to receive regular updates and visit our website www.calypsoaccounting.co.za for more information.