If you want to improve the results in your business then you need a target to aim for, a road map to show you how to get to your destination, and a system for monitoring progress.
Ask yourself:
• Did you have a sales, profit and cash flow target for this year?
• Are you happy with the results for this year?
• What do you want to achieve in the future?
• What can you learn from the year to date to improve future results?
It can be difficult to find the time to consider these issues when you are busy running a business, but a small amount of time spent now can pay big dividends to your results in the future.
Common issues
Here are a few key issues you need to consider, and get control of:
• Compare Results: By having a financial road map (budget) you have a regular procedure for checking income and costs are on track. You can see very quickly if margins are slipping, find out why and take corrective action.
• Identify Over-spending: Imagine if you had a small number of items of over-spending that added up to say $1,000 per month. If you left it until tax accounts are typically prepared it could cost you $18,000 in lost profits. With a monthly budget you can identify over-spending quickly and take action to fix it.
• Resources: A budget helps you to plan what resources will be required to achieve the sales you plan. This will help in avoiding crisis management which is no good for morale or work life balance.
• Funding: If you want to acquire business funding you will definitely be required to produce a budget and probably a business plan. A lending institution needs to be confident you have thought through your business and funding requirements. If they can see that you regularly measure actual versus budgeted results, they will feel much more comfortable with you as a borrower.
• Break-Even: Many people say “It’s too hard to do a budget because I can’t predict what I will sell”. This should not be an excuse! Most businesses know what their direct costs and overheads are, so it should be possible to calculate the break-even point. Once you can manage the business to a break-even point any sales above that are a bonus.
Increase business value
Anything you can do to increase your Net Profit can have a big impact on the value of your business.
As many businesses are valued on a multiple of earnings, it makes sense to increase this result.
Multiples of earnings vary depending on the industry but let’s say it is three – if you could increase your profit from $300,000 to $600,000 you would add an extra $900,000 onto the value of your business.
How?
This process does not need to be difficult or time consuming if you have an in house expertise to do so, otherwise gaining the assistance of an experienced expert will worth the effort.
Eric Tjoeng is the Joint CEO and Senior Practicing Partner at CAD Partners CFO On-Call (www.cfooncall.com.au). He can be contacted at erict@cadpartnerts.biz.
