Written by Davinia Upshall, Brainiact Mornington Central
As we enter a new financial year, now is the perfect time for you to get a handle on your business’s finances. Many small businesses manage their own bookkeeping and accounting, often only using an accountant for end-of-year accounts. That’s why I want to go through the steps you should take to keep your business in a healthy financial situation this new year, regardless of its size.
1. Create a clear budget
The first thing you should do is establish a clear budget for the next 12 months. An annual profit and loss (P&L) budget and a cash flow forecast are a must.
Profit and loss budget: Review last year’s accounts and possibly the year before. Create a spreadsheet for a 12-month budget that covers all your sales, costs of sales, and overheads. Set realistic targets for what you want to achieve, not just a repeat of last year. Aim high with ‘stretch targets’ and then break those targets down into quarterly or monthly segments.
If your business is seasonal, follow patterns from previous years and adjust for any changes impacting sales. It’s like putting together a jigsaw puzzle. Start by piecing together what you know, like the corner and border pieces, and then work through the more challenging, unknown sections.
You can use historical data to see what has changed since last year. Are there new factors affecting your sales that weren’t there last year? Were there seasonality issues last year that won’t happen again this year?
Forecast cash flow: Regularly forecast your cash flow to make sure you have enough money to cover your expenses. Identify all the money coming in and going out, and plan for tight periods by arranging extra funding if needed. Many businesses fail due to poor cash flow management, but by planning ahead, you can avoid these pitfalls. You can secure lines of credit or loans in advance, rather than facing a crisis.
2. Use good accounting systems
Using Excel is okay for very small businesses, but accounting software is much more efficient and accurate. Invest in reliable accounting software like QuickBooks, Xero, or FreshBooks. These tools automatically track your finances, saving you time and reducing the chances of human error. Make sure to pick software that suits your specific business needs.
Keep accurate records: Make sure all your financial transactions are recorded properly, including income, expenses, payroll, and taxes. Aim to update your records weekly so nothing slips through the cracks. Posting transactions in real time helps you keep a clear picture of your financial health.
If you work with bookkeepers or accountants, make sure you’re in control. Set service level agreements (SLAs) to ensure they do their work on time. For example, agree on when bookkeeping will be done and when you’ll review your monthly numbers. This prevents delays in making important decisions because you’re unsure of your financial status.
Make sure your bookkeeper posts transactions daily or at least weekly. By the end of the month, all entries, including journal entries, should be done by workday three or four. This way, you’re only a few days away from knowing your actual financial position, allowing you to forecast accurately for the next month, quarter, or year.
3. Check your financial health regularly
You should be creating and reviewing your financial statements every month. This includes your balance sheet, income statement, and cash flow statement. Knowing where your business stands financially helps you make informed decisions. Always aim to finalise your accounts by the first week of the next month to stay up-to-date and know exactly where you’re at.
Remember to monitor your progress. For example, if your goal is $1.2 million in sales for the year, that’s $100,000 a month. If you only hit $75,000 in the first month, you’ll know to ramp up your efforts in the following months to stay on track. Regularly checking in ensures you can adjust quickly to meet your annual goals.
I was chatting with a business owner who said, “Oh no, I never do any of that stuff.” I asked her how she managed her finances, and she said, “I just know that if I’ve got a minimum of, say, $10,000 in the bank and I hit my sales numbers, I’ll have enough cash.” But that’s not an ideal way to run things. It means you never really push yourself to grow—you’re just covering the basics.
Key Performance Indicators (KPIs): Keep an eye on important numbers like gross profit margin, net profit margin, and return on investment (ROI). You can use accounting software to track these automatically. This way, you always have a clear picture of how your business is doing and can make necessary tweaks.
4. Manage costs and debt wisely
To really grow your profits, focus on your net profit, not just sales and revenue. Net profit shows the actual benefit from all your hard work.
Increase sales and cut costs: You can boost your profit margins by increasing sales, cutting costs, or doing both. Often, cost control gets overlooked but it’s super important. Regularly check and manage your business expenses like utility bills, rent, and consumables. These costs can add up quickly, but they also offer big opportunities for savings. Make a habit of reviewing these expenses and consider renegotiating with suppliers or finding cheaper alternatives.
Handle debt wisely: Make sure you have a solid plan for managing debt. Regularly chase down overdue invoices and deal with any bad debts quickly. You can either collect these debts yourself or sell them if needed.
Keep an eye on your financing options, especially if you have significant debts like credit card debt or loans. Talking to a financial advisor can help you find ways to reduce interest rates, which will improve both your profit and cash flow. Lowering interest costs can make a huge difference in your financial health.
5. Stay compliant and manage risks
In Australia, tax rules are quite strict. Many small and medium-sized businesses end up with ATO debt because they don’t file their tax returns on time or manage their liabilities properly. This can leave money on the table or create unnecessary debt.
Make sure you keep up with tax regulations and file your tax returns on time. Hiring a tax professional can help you deal with complicated tax matters and make sure you’re not overpaying. Regular tax filing helps you avoid building up debt and potential penalties.
Implement internal controls: Having strong internal controls is super important to prevent fraud and mistakes. This means doing regular audits and making sure different people handle different financial tasks to avoid conflicts of interest. Even small businesses can benefit from segregating duties and doing regular checks.
So, if you use external providers for payments, be careful—hacked emails and systems can lead to fraudulent payments. Make sure you have good access controls to protect your business. I’ve seen organisations affected by fraud because they used external providers for payments, and hackers sent fraudulent emails leading to payments worth millions. Even in small businesses, it’s really important to have access controls in place.
6. Plan strategically for the future
Before you do any budgeting, you need to know what your business goals are: What do you want to achieve and when do you want to achieve it? From there, work backwards to create a detailed budget and forecast that includes growth, investments, and contingencies. A clear roadmap helps you stay focused and prepared.
Manage capital needs: Think about your business’s capital needs and look into financing options like loans, lines of credit, or investor funding. This will help you cover major expenses in your expansion like buying new equipment or hiring staff.
7. Educate and involve your team
Train your key team members on the financial aspects of the business so they can make informed decisions. Get your department heads and managers involved in budgeting and financial planning to promote accountability and teamwork. Also, set service level agreements with external partners to ensure timely and accurate work.
8. Seek professional advice
Regularly seek advice from financial advisors or accountants. Their expertise can help you manage your finances better and plan for the future.
9. Leverage technology
Once again, you should be using technology to automate tasks like invoicing, payroll, and expense tracking. This saves time and reduces errors. Implement financial dashboards to get real-time insights into key financial metrics, helping you stay on top of your business’s financial health.
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By following these straightforward steps, you can confidently take control of your business’s financial future. If you need any help or support in implementing these strategies, don’t hesitate to reach out to me.
