What sort of business are you? If it’s your own enterprise, are you a sole trader or a limited (Ltd) company? The type of company you choose to be affects...
Do you know how financially fit your business is? Many people don’t visit a GP unless they’re feeling ill, not even for a routine check-up. There are, of course, plenty of apps out there to help people monitor their health, but they’re not providing the same level of reassurance, or depth of insight, you get from a medical professional.
The same is true for business. Many people have means of tracking their daily transactions and may feel confident that they’re on top of things, but how financially fit are they?
We’re a business accounting service in Burnley and we help local small businesses with their financial affairs and planning. We think it’s important that businesses monitor their vital signs, and have a regular check-up.
Do you know how financially fit your business is? Here are our tips on the things you should be looking out for.
Are Your Records in Order?
Keeping records can feel like an extra administrative burden when you’ve got a business to run but it’s a vital part of running your business efficiently, and successfully.
The trick to keeping on top of your records is to be routine about them. Don’t let the receipts pile up.
There’s some excellent accounting software, such as QuickBooks, which you can integrate into your business processes and procedures – this doesn’t have to be complex, but it does need to be something you can easily access and keep up to date. There are plenty of free spreadsheet templates you can download.
When you want a clear idea of your business’s financial state, you need to be able to access up to date records – they’re the foundation for financial fitness.
Can You Pay the Bills?
Alright, so you might think this is too obvious – of course you’d know if you couldn’t pay your bills. But think about how circumstances can change. Business is rarely predictable, and there may be lean periods ahead.
Having a big enough financial cushion is crucial to the long-term health of your business, because if you’ve no emergency fund when the unexpected happens, then your budget will be under pressure.
If you need to borrow more to cover the shortfall this can lead to a spiral of debt and increased financial insecurity, putting your business at risk.
Do You Know Your History?
Managing your cash is crucial. This means more than knowing what you’ve got coming in – you should be on top of your cash-flow history for the previous three months to help look after the health of your business.
What can you see in the rear-view mirror of your business? You need an accurate record of your monthly income and monthly expenses, giving you a clear picture of your business’s profit and loss over a specific period.
Along with this profit and loss statement, you should have a balance sheet ready to hand, for a swift overview of the state of your financial health.
You also want clarity about how your sales match up to your overheads – what percentage of your revenue you spend on overhead expenses. This will help you see whether you need to cut costs to avoid financial risk.
Are You Getting Paid?
Do you have the right processes and mechanism in place to receive payments, and, just as importantly, chase them?
Consider online invoicing systems that allow you to send invoices and receive payments electronically. Also think about the most convenient means for your customers to pay you, whether this is by transferring funds electronically, or via credit or debit cards.
You should be keeping on top of your invoicing, and ensuring you have firm credit controls in place for late payments.
Not getting paid on time can cause endless headaches for small businesses. The UK Government estimates that SMEs are owed a massive £26.3 billion in late payments. This can hamper your growth and damage your business.
Knowing your three-month cash-flow history (see above) should alert you to accounts receivable issues, if you see that your sales have increased but your available cash has gone down.
Who’s Lending You Money?
When you need investment, ensure you choose the right financing vehicles that are appropriate to your business.
Term loans that are usually paid over a fixed period may be ideal for funding long-term expansion; while short-term injections of cash can come from other lines of credit.
Interest rates have remained low, which is good news when it comes to loans, but don’t put all your eggs in one basket. If you have one lender handling all your business operations you may be missing out on the kind of expertise in key areas you need.
A single source of finance might seem convenient, but you risk being locked-in to a deal, when varying your sources will give you a better spread of support and advice.
Looking ahead is as vital as looking back – you want your numbers to draw a good picture of where your business is going.
This means being able to access cash-flow projections and sales projections. You want to know if you’ll have enough cash to cover operating expenses. Your sales and any other sources of income should give you a good indication.
For sales projections, look at what business you’ve done, and how much of it you’ve yet to bill customers for.
What does your ratio look like? This is cash plus your accounts receivable divided by accounts payable or total expenses. The higher the ratio the better off you are, but a one-to-one ratio is alright.
Get in Touch
Do you need help with your financial fitness? We provide accounting services to SMEs in Burnley and across Lancashire. We look at the bigger picture, helping you look ahead for your business planning and development.