Small Business Tips - Get control of your finances

Managing your cash flow and controlling expenses

No matter how good your product or service might be - if you can't manage the financial side of your business, then you won't prosper ..... And chances are, you won't even survive.

This is the brutal reality of running your own business .... At the end of the day, if you don't have enough money in the bank to pay your bills, then it won't be long before you're forced out of the game. By all means, you have to be part visionary to start up a business - but you've still got to be aware of the numbers and do your sums as well.

So for this article, I went in search of someone who could offer us some good practical tips on how to control your finances and cash flow when you're running a small business. And I'm pleased to say that I found someone suitably qualified ....

Cherry Birch has over 25 years experience working and consulting in the financial services industry across Australia, the U.K and Malaysia. She is a Chartered Accountant who delivers tailored financial training to medium size and larger corporate sized organisations – but has a special interest in supporting small business owners gain greater control over their finances. Cherry is the founder of Financial Training Australia.

She is passionate about providing business owners and their key staff with improved financial literacy – so they can make better decisions that lead to more profitable business outcomes. I recently posed Cherry some questions about her own experience in starting up her business - and asked for some tips on financial management that would help small business owners......

1. What originally motivated you to start your own business – and what keeps you motivated now?

Well like many others I was made redundant from a large consultancy when their business was going through a down cycle and they wanted to transfer me from a fixed cost to a variable one! It was not exactly well thought through because my role was made redundant 3 weeks after it had been created. I have so much admiration for those who start their own business when they are currently employed. I think it is so much easier when you effectively have nothing to lose. I did contemplate applying for other senior consulting roles but I had been thinking of my own business for some years and so this was the impetus to go for it!

One thing that I love about running my own business is being able to be true to your own values. This has meant that I have turned down work when I felt it would have meant compromising my values. Also I have been able to develop some great relationships with my clients  - I truly enjoy working with them – and I enjoy the freedom of being able to run my business my way.

I recall once being criticised by one senior manager for apparently not being good at “closing sales” – he thought I should have been adopting a “hard sell” approach to get business. However I’m convinced that my commitment to a more relationship-based sales approach has been one of the keys to my being in business for more than 11 years!

2. Over the past 10+ years, you’ve consulted with many hundreds of business owners advising them on how to improve their financial management and control systems … What have you found to be the most common mistakes small business owners make with their finances?

Most of my clients are medium to large sized businesses so I may not be so qualified to answer this question, but then it begs the question as to whether small business put enough value in training their staff. We used to use the phrase - “If you think training is expensive, try calculating the cost of ignorance!”

I know there is the question of viability of training with the smaller numbers of staff in a small business, but there are still ways to make it cost effective.

I think generally small business often makes the mistake of being reluctant to invest in their people. Also I think it is so important to have adequately qualified accounting and bookkeeping staff, so you can rely on the reports that are produced. Additionally, small business owners must ensure they understand and check these financial reports – whether it be the monthly profit and loss statement or next quarters cash flow projections.

Business owners need to realise that their finance person might be great at producing various reports but they still have to be able to interpret the report and identify if there are any finance issues needing to be addressed . So unless the owners understand these financial reports, they are missing out on a vital control.

3. Cash flow can be a bane for small business – any quick tips on how to manage this?

Businesses simply run out of cash and yet many managers and business owners are often too busy to give this important aspect of their business enough attention.  The two primary areas in which most businesses tie up cash are receivables (the money owed to you by your customers) and inventories (stock)

Whilst you need both to run a successful business, money tied up in these areas can be “dead” money, since it is not working for you, and so can seriously affect your growth, profitability and even survival prospects.

Recognising the importance of cash to run your business, and having healthy practices in place so you can positively manage it, will assist your business to thrive. Managing cash flow becomes even more critical during difficult economic times. 

In my consulting with the Birch Consulting Group, we have developed ten essential questions about cash management practices, that can assist business owners to identify whether they are maximising the cash in their bank account.

Get paid promptly

i)            Do you have an objective for the management of receivables?

Calculate your receivable days (how quickly your clients actually pay you) and compare this to your  payment terms and conditions? ….. If your receivable days (time it takes to receive money owed to you) comes to 90 days and yet your terms are say 30 days – you will  most likely encounter cash flow problems!

ii)           Do you invoice promptly?

Invoice for monies owed in a timely manner. The quicker you invoice the earlier you are  likely to be paid.  This is even more vital if you run a service business; issue the invoice   promptly while the work is clear in their mind, otherwise the longer the delay in issuing the invoice, the more queries you may receive.

iii)          Do you ensure that disputed items on invoices are cleared promptly?

How many times have your customers used a query on a small part of the invoice as an excuse to delay payment on the whole amount?  Ask them if they are in agreement with the rest of the invoice and get them to pay the non disputed amount while you investigate their query.  Then clearly establish the disputed issue and work towards resolution so that you can receive the balance of the monies due.

iv)         When did you last review your credit terms?

Credit terms are not necessarily set in stone and can be changed – so providing you consider any potential effect on sales, shorten them but ensure you inform your  customers.  Often small business is at the mercy of big business, or competitors, in terms of their payment terms. However many of your key customers will have a specific date by which they need to receive your invoice in order to get it processed for  payment in that month. Miss that date and you could wait another 30 days to get your money.

v)           What follow up of outstanding invoices do you undertake?

If you do not chase, some clients will take advantage.  Good customer relationships can play a big part in influencing client payment practices, but for the slow payers you just need to be persistent.  If your client has cash flow problems they will often pay the noisiest first.

Manage stock levels

        vi)         Have you recently reviewed your management of Inventory?

How many days stock do you need to hold?  What are your current inventory levels of raw materials, work in progress and finished goods and do you closely monitor their levels in relation to your sales? Ensure you consider how quickly you can get stock to fulfil an order if the stock isn’t on hand.

vii)        Do you have a clear strategy?

Are you holding one of everything or do you have a limited number of fast moving lines? …… If you are a FMCG company (Fast Moving Consumer Goods), remind yourself of what the “F” is supposed to stand for! 

viii)       Is there wasted space in your warehouse or office?

Could you realistically move to a warehouse or an office, half  the size of your present one?  It would save you an enormous amount of money and whilst it would be hard at first, and may incur initial moving costs, the long term benefits may save your business.  You and your staff can learn to adapt and manage, if forced to do so.

ix)         Are you guilty of keeping JIC inventories – rather than JIT?

Most of you will have heard of “Just in Time” – where you do not hold inventory but get your suppliers to deliver it JIT straight onto the production line.  This requires an efficient production process and reliable suppliers (remember they want your business as much as you want your clients to remain loyal). However what about all those stocks that you are holding JIC – “Just In Case”? Challenge yourself as to the real probability of them being required, harden yourself and get rid of them – they are taking up costly space.

x)           Are you holding any obsolete inventories?

Again, if they are obsolete, grit your teeth and cut your losses, clear them out and free up the space. Conduct a regular review of your stock holdings and be realistic as to what you do need to satisfy your profit generating clients.


           4.   Cherry, you’ve seen many new small businesses fail within the first two years of start-up – and yet others succeed....... In addition to the financial management mistakes that you mentioned earlier, what other factors have you found contribute to the success or failure of a business in getting through the challenging start-up phase?

Get good advice. Ask other small successful business owners to recommend professionals and providers to help you. Very few people are unwilling to help and make recommendations. Realise although it may feel like you are alone, but you do not need to be.

Seek networking opportunities and plan to catch up with others on a regular basis to have an outlet to discuss your business problems. It can be lonely and you have some good weeks and some bad ones – good to have others to talk to who understand since they have been there before.

I remember when I first started attending consultant networking meetings, speaking to another consultant who had been running her own business for 16 years. She told me it took her 5 years to stop being paranoid about where the next job was coming from!! ….. That made me feel so much better to realise I was not the only one that suffered from that type of uncertainty! I think I was like that for the first 2 years of my business. However, having survived that tenuous “start-up” stage, for the past 9 years I have been more anxious about how my business was going to cope with the demand that we generate!!

5.   What should a small business owner consider when selecting an accountant for their business?

Brian I am cautious about giving advice on this, since I no longer practice as an accountant, but here goes:

• Be clear on what you want  - do you want someone to just do your books for tax purposes – for compliance - or do you want an accountant who is going to give you tips and advice?
• Again ask for recommendations from others
• Meet with a few to see if they speak a language you can understand!

I engaged my own tax accountant once I started my own business since whilst I am a qualified chartered accountant I am not a tax expert and besides I am not an expert on Australian tax.

6.   Last question Cherry ..... What about small business owners who are looking to grow their business – any advice? There have been many instances of SME’s expanding and growing too quickly and subsequently over-committing themselves to bankruptcy – so how do you avoid this problem?

I think this goes back to the question re cash flow.

Put together a business plan to ensure you have thought through the extra cash resources you need for expansion. Also challenge yourself to ensure you are not being over optimistic ...

Go through the worst case scenario, assess the likelihood of this and check that you could indeed handle it, if it has more than a 10% chance of occurring.

Cash flow is the hardest thing to predict, so do some cash flow budgeting for a few months and then compare it with the actuals to see how good you are at predicting cash flows. Hopefully this will give you confidence in going forward.

Do your growth plans really have to be done all at once – or can they be implemented more gradually so as to reduce risk.

I designed a training course on How to Write a Compelling Business Case this year – it has been very popular. Whether you are a manager in a large corporate or you are running your own small business, you need to think carefully before committing any significant expenditure to an expansion initiative. A cost-benefit analysis can ensure that your passions and ambitions are harnessed in a measured way. Success in business comes from equal contributions from the heart and the head.

There is no escape from the need for good management and disciplined planning …. This is the key - that you develop sound systems and procedures as part of working on the business – so that over time, you will not have to work so much in your business.

Thank you very much Cherry - you've shared some great tips. Particularly in relation to preventing cash flow problems - which goes to the heart of the viability of a business. I've seen too many small business owners over the years become highly stressed and pressured, because of problems created in this area. And those pressures can so easily then start infiltrating into other parts of life - impacting on family relationships and becoming a source of tension and conflict. So I'm hoping our readers consider your advice and perhaps evaluate some of the financial practices and processes within their business. Bye for now.

About the interviewer
Brian Carroll is the founder of Performance Development, a training business in Melbourne, Australia.  He is an experienced management coach with a passion for helping people achieve their goals in life and business. You can find out more about Brian at his Google + profile