Our Chamber theme for May is budget and finance strategy. It’s
an area where many small business owners struggle, particularly in the first
few years of operation. It’s become so very easy to start a business and it seems that more and
more entrepreneurial individuals are departing the drudgery of full time work
in the hope of creating a better income and a more flexible lifestyle.
Many are stepping out of secure employment for the first time,
armed with much more optimism than capital. That’s not to say it’s always a bad
move – but there are certainly likely to be some massive challenges if you’re
not in a strong financial position from the beginning. One of the most common
challenges is maintaining and managing cash flow. Mistakes include:
1. Failing to keep bookwork up to date. The effect
of this can be that the business owner has no idea how much profit the business
is making, or if it’s running at a profit at all when all costs are factored
in. That information is of the utmost importance – it can alert you to profit
margins that are too low, overspending, unpaid accounts, and other issues that
could affect the viability of the business.
2. Spending freely on advertising and marketing hoping that campaigns will bring in enough new business to cover the costs and provide additional cash. When you first start out you’ll probably have little idea how well different forms of advertising will work for your business. Taking a few chances may be a necessity however, it’s vital to measure the success of each campaign, and know what each new customer acquisition is really costing you. When you’re constantly measuring the success of your advertising, you’ll be able to cease spending time and money on strategies that don’t produce worthwhile results, and focus more on those that do.
3. Drawing too much money from the business. New business owners without backup capital are in the awkward position of needing to draw funds from the business to survive and meet their own personal commitments. When a business isn't making sufficient profit for this to be viable, something has to give – either the owner draws the funds anyway, leaving the business without sufficient funds, or the owner has to weather financial difficulties on the home front to keep the business going.
2. Spending freely on advertising and marketing hoping that campaigns will bring in enough new business to cover the costs and provide additional cash. When you first start out you’ll probably have little idea how well different forms of advertising will work for your business. Taking a few chances may be a necessity however, it’s vital to measure the success of each campaign, and know what each new customer acquisition is really costing you. When you’re constantly measuring the success of your advertising, you’ll be able to cease spending time and money on strategies that don’t produce worthwhile results, and focus more on those that do.
3. Drawing too much money from the business. New business owners without backup capital are in the awkward position of needing to draw funds from the business to survive and meet their own personal commitments. When a business isn't making sufficient profit for this to be viable, something has to give – either the owner draws the funds anyway, leaving the business without sufficient funds, or the owner has to weather financial difficulties on the home front to keep the business going.
How do you turn
things around?
If you find yourself positioned anywhere along that slippery
slope, it’s time to act. Tackle the bookwork. Once it’s up to date, establish
if the business is operating at a profit, and if so, what the profit margins
are. If you need assistance to do this, seek the help of a bookkeeper or
accountant.
Once you've established your financial position, it’s time
to consider the facts and decide whether or not you can turn the business
around and stabilise the financial situation. If the problem is a lack of
profit, the solution may be as simple as increasing prices and/or reducing expenses.
But remember that once that is done, it will still take time for the results to
filter through. Other options might include refinancing and raising capital.
If you've ignored the problem for some time and the
situation is dire, then it may be time to consider if it’s viable to continue
running the business at all. A frank
discussion with your accountant might help you to sort through your options and
make a decision.
Turning a business around takes time. Once you do, you’ll
want to ensure you don’t experience the same difficulties in the future.
Perhaps the single most important factor is being aware of your financial
position at all times. Keeping the bookwork up to date and regularly reviewing
profit margins and expenses can allow you to identify emerging problems before
they threaten your business viability.
Taking your business
to the next level
With the finances under control and the business generating
a good profit you will then be in a position to plan for the future. It’s a great
time to speak to relevant professionals and other business owners to learn more
about business development and open yourself up to opportunities.
If you could use a little inspiration to prepare you for the
challenges ahead, come along to our Business After Five on 28 May 2014 to hear the
start up stories of Two Birds Brewing
and Clear Complexions. The event is being hosted by Price Waterhouse Coopers and
held at the Castle Hill Country Club.
