When times are good and cash is plenty, is hard to know (or even care), if you have good financial control. The impact of being “out of financial control” l will often rear its head when times are hard.
So ensure you can recognize these early warning signs before financial problems spiral out of control and hinder your business.
1. You avoid looking at your bank statement.
Do you get a sick feeling in the pit of your stomach every time you go to look at your bank statement? Are you unaware of how much money you have in the bank or worst how much you will have in the bank next week? If so, it’s time to build a cash flow forecast.
Using an excel spreadsheet, your forecast should be projected forward weekly and dynamic enough so you can change and rephase costs before they are spent. This provides a flexible way to plan future income and cost centers for your business.
The forecast may not be great news, but at least you know where you are heading. Once you know, you can make plans to address it. Often, just having line of sight gives you the ability to plan forward. If you remain in the dark about your business finances, it is not only stressful, but will stop you from making good financial decisions in the future.
2. Your employees seem better off than you.
Do your employees seem to be in a better financial position than you? If so, this could mean that your personal expenditures are misaligned to your business finances. It is important to know how much you need to reinvest into your business.
For starters create a conservative personal budget. Make a plan to reduce your debt and spending. And don’t drain your business with excessive drawings for personal needs. Knowing how much you can actually afford to pay yourself is a powerful figure. It will ensure you only make personal withdrawals that are sustainable for your business at a certain point in its lifecycle. As your business grows, you should be able to increase your withdrawals respectively.
3. Business debt payments are unmanageable.
As you grow your business, debt may be unavoidable. However, if your interest payments are so large that you struggle to make the minimum payment each month it is time to develop a plan of action. First, review each line item of debt you have, personal debt and business debt.
Next, consider a smarter repayment method. “One notable repayment method is the Stack Method. In its simplest terms, this means reviewing all of your outstanding debt by the amount owed and the interest rate. Next, you prioritize your payments, paying down the highest interest debt accounts first while paying the minimum due amounts on the other accounts.”
If you are unable to repay your debt then consider consolidating it to reduce the overall average interest rate. For example, if you have equity in a property and high credit card debt, you may be able to leverage the equity in your home to pay down high balances.
Likewise, you can raise equity funding and reduce the amount of high interest debt in your business. Alternatively, is it worthwhile to raise long-term funding to substitute short-term more expensive funding. Also, if you have a cash flow forecast you will be able to plot new figures to see what is workable.
4. You have no idea where your money goes.
Take control and stop incurring debt immediately. Log and categorize every single expense. This can be the toughest step since you have more than likely been spending money you don’t have for a while. It may feel cumbersome, but in the long run you’ll learn where you have been throwing money away.
Often it’s a number of smaller costs that add up to a larger amount. When you look at costs over a period of time, instead of in isolation, you begin to see the true magnitude of your spending. When you categorize your spending it will improve your decision making. If, for example, 40% of costs are discretionary they can be rescoped, postponed or cancelled.
5. You’re cash poor even though sales are increasing.
If you feel you are running a business that is literally surviving “hand to mouth”, this may mean you are investing in growth, but the returns are not materializing. Measure the return on each investment. This includes money spent on a new online program or placing Facebook ads. If you don’t get sufficient payback (based on your goals), cut or rework the initiative.
For instance, if you hire a part-time telemarketer and pay $1,000 per month, a goal is to generate sufficient sales by month 3 to cover the costs associated with your new hire and turn a profit.
6. You’ve exhausted personal savings to stay afloat.
If you’ve been injecting personal savings into your business and there is still no improvement it’s time to revisit your business model and revenue model to see if it’s actually profitable. Vendor pricing changes, higher overheads and excessive or uncontrolled variable costs can quickly turn a profitable business model into a huge loss.
Always have a clear idea of your gross margin ratio (to ensure gross profit will be sufficient to cover selling and administrative expenses) and your profit margin ratio that “shows what percentage of sales are left over after all expenses are paid by the business.”
Being able to calculate these ratios will help you keep a close eye on how your costs fluctuate in relation to sales.
A mere few months of working at a loss can severely damage any reserves you have built up. Protect cash reserves you have by having these important flags in place to immediately warn you when your business finances are going off track.
This article has been edited and condensed.
Hayley Chiba is the Director and Owner of Better Numbers Limited, a niche financial management company that works exclusively with growing small businesses. She specialises in providing solutions to cashflow and financial management problems through 1:1 consultancy and online courses. Connect with @betternumbers1 on Twitter.