How to monitor your business & keep it safe: Financial Systems
Managing and monitoring a business is always a difficult task, from market influences to staffing issues, keeping one’s business on track to succeed and grow is a true balancing act.
Sometimes, however, despite best efforts, things don’t go to plan and the balance tips towards uncertainty for the business. It is essential therefore for early warning signs to be recognised and acted upon.
Usually business owners, especially those that maintain close links to good quality external advisers, will spot the symptoms themselves and take early corrective action. It only becomes a problem when any issues are not noticed or, even worse, ignored and that symptom turns into a potentially fatal illness for the business.
We will be highlighting the triggers to watch out for in a series of news items to be published over the coming months.
The second in our series highlights the importance of good financial management and systems in order to ensure accurate monitoring of your business.
A total common sense tip, but one that can be overlooked, is ensuring you keep a budgeting system for your business. Planning for future expenditure and activity levels is a vital tool to enable you to co-ordinate your business activities, control expenditure and measure actual business performance.
Without keeping proper and accurate recording systems, you will have no focus or goal to aim at, you will not know when to factor expected costs into your cash flow and indeed any unexpected costs.
Just one large expected cost and one or two unexpected ones, could put your cash flow and therefore business on a bit of a wobbly track. If you keep accurate budget models, you can ensure you cover your regular expected costs, and build in a contingency for those unexpected costs, ensuring you keep your business in a stable position.
Costing and Pricing System: Inaccurate or Absent
It is self-evident that, if you cannot be sure what something has cost to make or in service industries how much your time costs to cover overheads, you are setting your business up for a fall. Pricing things correctly should not be a matter of guesswork but an exact formula.
A business can fail simply because of a lack of understanding of which products/services make loss and which a profit. It is imperative to understand what things cost e.g for a product, the cost of component parts, overheads on production etc, and the price at which they can be sold including a profit margin. This will ensure you aren’t selling yourself short and underpricing, even undervaluing, your products/services.
Regular Management Accounts and Reports
In order to monitor your company’s financial performance, you and the management need accounts at much more frequent intervals than the statutory annual figures. A lot can go wrong in a year.
Dependent on the type of business management and size of business, reports should be available monthly, weekly or even daily if you are a cash-based business.
Management accounts and reports should also cover each sector of the business separately, where more than one type of business is being carried on, where there is more than one product, or where there is more than one location.
Without that kind of split it is difficult to pinpoint problem areas, or indeed to know what aspect of the business is particularly successful.
Purchasing Policy Absent or Inefficient
Lack of a sound, reasoned purchasing policy will mean that the company may pay too much for its supplies and obtain poor quality supplies.
You need to look for a system that considers such factors as economic order quantities, effectively uses discounts which may be available, has materials specifications set and has the ability to bargain on prices charged. You should approve your suppliers based on these criteria to ensure you are getting best value and quality for the price you are paying.
Poor Stock Control
Carrying too much stock means funds and space are tied up unnecessarily. Too little stock means production delays, higher costs and later deliveries to customers.
Old and obsolete stock being kept can mean profits appear artificially high if the stock has not been written down to its real value.
Regular and good housekeeping of stock and order levels need to be maintained to ensure best practice.
Weak Credit Control
The credit control function is essential to a business for two reasons. Firstly, bad debts go straight through to the bottom line of your company’s financial performance in a far more devastating way than relative inefficiencies elsewhere.
The motto is that “Sales are only any good if you get paid for them”. It is far cheaper not to sell than to sell and not get paid. Serious bad debt problems can alone destroy an otherwise sound business.
Secondly, managing the amount outstanding from debtors is an important part of controlling the company cash flow and its borrowing requirements.
In the next article we will examine Products.
If you would like to learn more about the warning signs of business failure and or would like to discuss the future of your own business please contact me on the details below.