If your business doesn't make money, you won’t be in business for long. These four things should be in your financial toolkit to keep you on track?
- Know your numbers
- Set goals and build a forecast around it
- Manage your cash flow
- Have a strong, competent, financial team
These four things may sound obvious, but many businesses get them wrong which impacts their financial performance and ultimately their business valuation.
1. Know your numbers
Firstly, you need to have a good set of historical numbers.
If your financial information is in disarray and you don't have information at your fingertips, it's time to get this in order. With the number of good financial software packages out there, there is no excuse for not having decent reporting. You should be able to hit a button and produce accurate and informative financial reports.
Once again, this might sound obvious for many business owners, but you would be surprised at how many businesses cannot do this easily. If finance and accounting are not your strong point, get a bookkeeper to help you. Fees start at a few hundred dollars a month, and are worth every penny.
The cost of making poor financial decisions could be massive. For example, if a project is not priced correctly, the business could suffer irreparable damage. The right software can enable businesses to gather, analyse and share insights across the company to provide vital business intelligence.
Knowing your numbers is also critical when you are trying to sell your business. Having solid financial reporting builds buyer confidence and reduces the perception of risk, which has a positive impact on company valuation.
2. Set goals and build a forecast around it
The most profitable companies always have a formula for success:
- They know how to generate leads
- How to close the leads, and
- How to deliver to make a profit.
When these are systemised and combined with a good financial strategy it's a blueprint to scale. This also allows you to forecast with relative accuracy, which improves performance and increases value.
If you are not currently doing financial forecasts, start by doing a one year forecast and update it either monthly or quarterly.
- Get a sense of how accurately you are forecasting and why.
- Make adjustments and improve.
Not only will this help you look at your business in a different light, but if you do want to sell your business at some stage, it will help you explain to a buyer what they are acquiring.
In an ideal world, you will have a CFO that can build your forecast (with or for you).
3. Manage your cash flow
How aware are you of your current cash situation?
Every business owner should know how much “runway” their business has at any given time. This includes knowing how long your business could survive if revenues suddenly came to a halt as occurred with many businesses during the onset of the COVID-19 pandemic.
The problem is most businesses don’t tuck a surplus of money away for a rainy day. But rainy days do come, often suddenly, and without strategic preparation, they can be devastating to businesses.
Other than the mere question of your survival in business, cash flow has a big impact on financial value.
Good cash flow management is arguably one of the most important aspects in any business, no matter if it’s a start-up or a well-established enterprise. But if we look at the statistics, at least 30% of businesses fail because of cash flow.
4. Have a strong, competent, financial team
Who do you need on your financial team? The answer depends on a few factors. But even if you are an accounting guru, it's likely that you could benefit from support in this area.
Let’s look at an example of a medium-sized engineering firm was turning over close to $50M. They had an outsourced bookkeeper and no internal financial controller. The owners were not accountants by trade, and their reporting systems lacked the sophistication required of a business their size.
You may argue that this did not stop them from being quite successful, and to a degree you would be right. But with the right financial advice, they could have reduced financial costs and risk. They may not have generated more revenue, but they could have been more profitable.
When it was time to sell their business, it was challenging for them to get the information needed to build the appropriate business case and provide for the due diligence process.
When you struggle to provide the appropriate information, or there are accuracy issues, buyers will discount the value of your business, or worse, they will walk away.
When should you engage someone to help you with this? The timing and level of support will vary, based on your business. But fortunately, there are lots of different models, and outsourcing options these days. Regardless of your size, make sure your finance team is able to think strategically and have an opinion.
Outsource the smaller tasks that are taking up your time. But if your business is turning over more than $10M, then you really should have a dedicated CFO. Whether this is outsourced, or employed full-time will depend on your business model. But keep in mind that whatever you did to get to $10M in turnover, will be different to what is required to get you to $20M and beyond.
