Good financial management is the backbone of any business. It involves monitoring and managing cash flow to ensure that the business meets all its commitments and provides a good return to the business owners.
Below are the key financial questions every business owner should be regularly answering.
1. What are our current and expected future costs?
Business costs can be divided into two broad categories – fixed and variable.
- Fixed costs stay the same regardless of the level of business activity — for example, lease payments on business premises.
- Variable costs, on the other hand, can increase or decrease based on the level of business activity or output — for example, the cost of electricity or raw materials.
You should regularly analyse both your fixed and variable costs. Look to minimise or eliminate any non-essential costs.
You should also prepare monthly, quarterly and yearly budgets of your expected future costs by looking at your current costs and forecasting. Make sure that your expense forecasts are realistic and that they include a buffer for emergencies.
Once you’ve set an expense budget, it’s then crucial to monitor it and identify any overspending as quickly as possible. You can then take steps to manage the overspending situation before it becomes a significant financial issue for your business.
2. What are our current and potential future revenue streams?
Ongoing revenue is crucial for the survival of any business. You should regularly analyse trends in your revenue. Is your revenue increasing or decreasing? Why?
If your revenue is decreasing, you need to either take steps to reverse the trend or to cut your expenses, or both. If you don’t, you could run into financial trouble.
You should also look for new revenue streams wherever possible. Diversifying your revenue streams can insulate your business against downturns. Many businesses have had to think outside the box to generate alternative revenue streams due to COVID-19 restrictions in Australia. For example, by enhancing their online sales.
Prepare a budget of your future revenue and compare it to your future costs to help you manage your cash flow.
3. What are our cash flow requirements?
It’s crucial to monitor your cash flow to ensure that your business has the funds you need when you need them. This involves analysing the timing of your expenses and revenue.
There may be steps you can take to adjust one or both to help you to have smoother cash flow, so you’re not short on cash when it comes time to pay your employees or everyday business expenses.
For example, you could adjust your payment terms for your customers if you offer credit. Offering customers on 30, 60 or 90 day accounts a discount for early payment can boost your cash flow.
Another way to smooth cash flow is with Invoice financing. Invoice Financing is a line of credit that provides funding based on outstanding invoices. You can receive up to 90% of the value of the invoices upfront which increases cash flow that can be used for operational costs or invest in growth opportunities.
Here's an example of how invoice financing can help businesses improve cash flow and grow:
You might be run a small business that manufactures toys. A large retailer wants to place an order for 2000 toys. You will make a lot of money, but the retail chain won't pay you for the order until 90 days after you deliver the toys. You know that you’ll need to buy the parts for the toys, pay your employees and pay to ship the toys to the retailer. The entire process could take 30 days.
It would be a great opportunity to make money and get your toy in front of new customers. However, you realize you can’t afford to pay for the parts, employees, shipping and all your usual business expenses while you wait for the payment. Unfortunately, you have to say no to this great opportunity because you aren’t making enough money to cover all the expenses.
With Invoice Financing, you'll be able to say "yes" to this opportunity. Rather than waiting 90 days for your payment, you can receive up to 90% of the value of the invoices immediately. Those funds can then be used to purchase parts for the toys and cover other costs.
4. Where should we get additional funds if we need to?
Many businesses leverage finance to expand, grow, and take on new opportunities. It’s important for your business to identify the most cost-effective debt or equity finance options. Debt finance has the advantage of allowing the current owners of the business to keep full control, whereas, with equity financing, a share in the business is often sold.
Types of debt finance include:
5. What are our short, medium and long-term financial goals?
Setting financial goals provides a pathway for your business to follow. It’s vital to set short (less than 12 months), medium (2 to 5-years) and long-term (greater than 5-years) financial goals for your business. Each of these goals should have SMART characteristics. SMART is an acronym for:
- Time-bound (in other words, it has a deadline).
Examples of SMART financial goals are:
- To increase monthly sales by 10% by June 30, 2022 (short-term).
- To pay off all current business loans by June 30, 2025 (medium-term).
- To have online sales revenue surpass in-store revenue by 30 June, 2030 (long-term)
Setting goals and managing cash flow are effective ways to ensure the growth and profitability of your business. Keeping up to date with what’s happening with your business means that you can quickly pick up on any inefficiencies and put a plan in place to correct them.
If you'd like to learn more about how Earlypay can help your business with our invoice financing, asset finance or trade financing, please call our friendly team on 1300 760 205 or contact your broker or BDM.