Last Update: June 11, 2015
“Plan for the future, because that is where you are going to spend the rest of your life (Mark Twain).”
Have you taken a look at your financial statements lately? Is your small business financially healthy? If not, here are four ways to improve your company’s financial future today.
1. Stay liquid.
How readily can you convert your business assets to cash? If you’re not sure it may be time to consider ways to improve your company’s liquidity, because cash management is a key element of small business success. Cash balances should show positive long-term growth. For example, “On average, service companies under $5M show their cash balances growing at 13% and revenue growing at 22% – this tells us that the (company) as a whole is headed the right direction.”
Businesses have been holding cash for decades, however in uncertain economic times it can only help to develop a liquidity plan. If you’re cash flow positive, start by saving a certain percentage of sales for a rainy day. Planning for the future with anticipation for access to cash is a smart move for every small business.
2. Curb debt.
Think carefully about taking on additional credit card debt. Credit cards are now the most common source of financing for America’s small-business owners, according to a National Small Business Association survey. Review your current credit card interest rates, fees and shop around for better rates and renegotiate more favorable terms.
3. Analyze accounts receivables.
Do you have a large number of receivables? Many businesses spend an exorbitant amount of time chasing down payments; taking the focus away from more important business development activities. If you carry a large percentage of receivables on a constant basis, you may want to consider accounts receivable factoring.
Selling accounts receivable (i.e., invoices) to a third party (called a factor) at a discount can help with interim cash flow concerns and position you to better manage receivables in the future. Before doing so, don’t forget to factor in the actual costs of this type of financing.
4. Maximize margins.
Never compete strictly on price; it’s not sustainable. Instead focus on selling value. “Quantifying and articulating the total cost of ownership of a product—or the total benefit of ownership to the customer—requires a focus on value,” according to Thomas Kratzert, the Vice President of management consultancy A.T. Kearney.
“Keep in mind that value must be defined from the buyer’s point of view, not the seller’s. Companies sometimes make the mistake of overemphasizing the features of their products, when they should focus instead on the hard and soft benefits that the customer can gain from the product.”
Ultimately, higher profit margins will improve overall profitability. Also seek ways to cut costs and minimize expenses.
Making these small financial adjustments in business can help you improve the financial health of your organization. Utilizing small business ratio calculators can also help you gain deeper insight into your financial position.