BGES

There is a lot of things about small businesses that we love which also give them an advantage over their larger competitors.

To name but a few…

• They are agile and can move quickly when decisions are to be made and action is needed.
• Often those in the business are more passionate and driven and are working with a purpose.
• They prioritise relationships leading to more personalised and superior service levels.

 

So, if there is a lot to love about small businesses why do so many fail?

 

New data from the ABS has revealed that half of new businesses failed between 2019 and 2023 and Australian business closures are at their worst rate in 15 years with 60% of small businesses failing within their first 3 years.

Often the difference between success and failure in a business comes down to a lack of strategic financial management. Or put more simply businesses are not managing their finances with an intention and a plan to succeed.

Many small businesses go in with the plan that to succeed you need to minimise costs and doing your own accounts or getting an inexperienced family member to do these is one way of minimising costs. More often than not this ends up costing them more money than it saves them.

Even those who have a good bookkeeper/accountant balancing their books and keeping them compliant but stop there are doing nothing but keeping a clean home. That is a good thing, no doubt, but it’s the design and layout of the home that makes it a success. And that is to say nothing of the planning required for when your family grows!

So then, what does strategic financial management look like practically then? Here is a guide for businesses looking to set up the financial capability they need to allow their business to succeed.

 

Finances that support your business plan and overall growth/exit strategy.

It all starts with your businesses plans and goals and the strategies that you are engaging to achieve this. If you have plans on growing your business rapidly in the next 2-3 years, how do you plan on funding this growth? If your business is reliant on goods acquired overseas to deliver its revenue, do you have a plan to ensure secure payments that are not going to leave your working capital bare? Just like a sale is not a real sale until the money is received, a plan is not a real plan unless you have worked out that it is financially achievable! 

Another vital component to this is understanding your ongoing financial results with consideration of your businesses overall plan/goals. For example, your business may have achieved its overall sales target for a period but if you are not seeing growth in the market segments you have made your focus then this may not be the success that the numbers seem to suggest.

 

Realistic Budgeting & Forecasting including cashflow management.

Having worked with many small business owners, it is evident that they tend to be more bullish when it comes to their sales projections and bearish when it comes to the costs to deliver these. It is not that they are being completely unrealistic, it is more that they are usually setting a budget for what the business could achieve rather than what the business most likely will achieve. By setting a most likely budget a small business is developing a roadmap for its likely future activities, which allows it to plan for the resources it is going to need for these activities. Most notably a budget completed on a monthly basis and a rolling cashflow forecast, where you track and project your cash movements, will give a business the capability to plan for its cash requirements and any inevitable road bumps.      

 

Bespoke financial reporting that gives businesses the information they need to make better decisions.

There is more to be understood from your financial reports than whether the business made a profit or loss and the value of its assets and liabilities. One valuable technique is to set up your profit and loss through your information systems so you are recording your sales and corresponding direct costs broken up by category, channel or service being provided. This allows you to analyse and compare your sales and profit margin performance to understand the areas of your business that are most profitable and where you might wish to invest in your business going forward to maximise profitability.

 

Adapt based on the life cycle of your business and industry.

How a business manages its finances is not a one size fits all approach and in particular the stage of the life cycle that your business or industry is in can have a major impact on the strategies you need to employ.

For example, a business in its Start-up phase will often be faced with negative cash flows as it looks to invest in the R&D, marketing and infrastructure required to gain market share while being faced with limited finance options. Thus, any new business must factor in the seed capital that will be required to grow the business during this phase. In contrast a business in its maturity phase should expect to be seeing a positive cash flow out and strategies will be focused on defending market position and ways the business can be maximising its profitability.     

 

For any business to be successful it needs to have a robust business plan that starts with practical business growth and sustainability strategies. While there are many different components to this one of the most important is the strategies you employ to ensure your finances are strong. If nothing else having a clear financial roadmap to achieve business profitability, including a savings plan for future investments or unexpected downturns and maintaining control of your cash flow will help you avoid your business becoming one of the far too many businesses that meet an early demise.

Joseph Essey – Associate Partner – Small & Medium Business Advisory, Accounting and Financial Control

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