I’m often surprised at how little some new clients know about their own business – even such simple facts as what their monthly overheads are. This is information that can mean the difference between success and failure.
I tell these clients that staying up-to-date is crucial, and that there’s no excuse not to be. All it takes to clearly understand your position and make the right decisions to run a robust and profitable business, is a monthly check of the following key indicators of your business’ health:
1. Monitor cash
Cash needs to be closely monitored as it is the single most important indicator of business performance. With cash, it’s imperative that it is monitored more daily than monthly. It is also important that it is monitored on both a short-term and longer-term basis.
2. Financial reports
Too often I see businesses reacting to information months down the track. It is imperative that accurate reports are prepared on a monthly basis, close to month-end, so you can react in real-time to market changes. Most software can provide reports – from large businesses with fully integrated programmes, to smaller companies using bank-link type reports. Don’t just do your GST and move on to the next job – print your monthly reports and review them.
You must understand your customers. You should be regularly asking them what they want and what they think of your product or service. Use technology to help you connect and measure with them.
Many clients not know their monthly overheads, yet it is such an easy calculation – even if done as basically as dividing annual overheads by 12 months. It is essential information to have in order to know when you’ve reached that crucial breakeven point in the month and have begun to make a profit.
5. Key relationships
Strong relationships are fundamental to business success. So find a bank manager you connect with, who will give you their direct dial number, and make sure you stay in touch. Likewise it’s imperative to have strong relationships with key suppliers. They’re often willing to extend payment terms or give discounts and allowances, so constant communication is the key. Huge benefits can flow to your business including improved margins and support through tight cash flow periods.
6. Gross margin
Know your pricing model and continually strive to maximise your margins. Gross profit and margin are key financial indicators that need to fall out of your monthly reports. Only by understanding your model can you strive for improvements.
7. Debtors and creditors
Monitor your debtor levels monthly. It’s important to measure the days outstanding and have formalised methods of collections. This often requires continuous follow-up and a firm consistent approach. Also measure your creditor levels monthly. Huge gains can be made by using technology and managing creditors on line, and by eliminating cheque payments.
8. Stock control
Measure the stock that is key to your business on a monthly basis to obtain accurate financial reports. This doesn’t necessarily mean monthly physical stock takes, but it does mean having a programme to monitor levels, ageing and shrinkage. Rolling stock takes and spot checks are useful. Stock – along with badly managed debtors – is often the culprit when money runs out.
Great employees are the key to business success. You need a process for collecting all the great ideas your employees have. You also need to monitor staff turnover on a monthly basis.
The difference between a dream and a goal is a plan. You must have both short and long-term business budgets, and review your monthly results to budgets. Most software easily accommodates budgets.
If you’re stuck or confused about any of these matters, ensure you get professional advice sooner rather than later. Staying up-to-date is fundamental to good business.