It’s the start of the year, and in these early days, it’s natural to take a look at how your business is going financially. The unfortunate thing is that this step is often where SMEs make their biggest mistake. They look straight at their bank account and that’s it. I’m guilty of this too, and in Ravit Insights’s dealings with a wide range of companies, the same holds true for other owners.
We too frequently take the shortcut of looking at how much cash is in the bank to guide key decisions. When running a business it can be very easy to get caught up in the day-to-day operations and looking for shortcuts like this one can land you in trouble.
So if you make one resolution for 2020, make it to no longer manage your business by looking at your bank account.
Before we go on, there is of course an exception to this rule.
If your business trades profitably, and conditions are relatively unchanging from month-to-month, the bank account barometer is likely an adequate measure of how you’re tracking. You’ll also likely have a buffer built into your bank account to absorb any monthly or other one-off payments.
Look beyond the bank balance
For most business owners you will need to look beyond your bank balance to accurately see how your company is running.
There are several important factors you need to consider:
- Is your revenue growing, flat or declining (depending on your business model, you either want consistent revenue, or growth)
- Are your expenses growing, flat or declining (also check if expenses are in line with revenue changes)
- Do you have money in reserve for large expenses or emergencies?
- Do you have debt and is it sustainable?
- Do you have a healthy pipeline of work with new and repeat customers or clients?
Depending on your business model, the answers to these will vary but all will come together to indicate the financial health of your company.
Get familiar with your balance sheet
By this we really mean becoming familiar with your liabilities. Mid-month your balance could look very healthy, you’ll have all your invoices coming in, and think you’re on a roll.
But it can be too easy to forget your outgoings and liabilities which will include:
A strong balance sheet that you are familiar with should mitigate and help you plan and prepare for any upcoming outgoings. Never forget that a full bank account can be mis-leading and on its own, a fast-track to poor spending decisions.
A note on February
February for many is when the working year gets into full swing, but for under-prepared business owners this month can also come with a shock. It is the only month of the year when you’re likely to have overlap with PAYG for December and January due, as well as the December quarter BAS. Depending on how big payroll is for that period, that could be a big pay out and if you haven’t planned it can really stretch your cash flow. On the incoming side, December and January can be slow months, people are off on leave, so they might take longer to pay and you might not have all the invoices paid yet. It’s also a key month for a growing business with many owners putting fresh plans in place. But if you’re pushing hard, remember to keep an eye on what you’ll owe.
If your account is empty
If your bank balance is low, it can quickly make you nervous. It does for me. That’s why it’s important for your sanity to revisit your forecasts, liabilities and see if you are owed money. No matter how busy you are, it is important to keep on top of invoices and make sure they are being paid. This is where good processes (read our piece on that here!) will help maintain a consistent flow and support.
A final note is to ensure you have the support around you. If finance is not your thing, it will be worth paying for the right assistance whether that is through an accountant, getting a good financial model in place or through the right business strategy advice.
This will free your head space to work on the aspects of the business that you really excel at, a move that should ultimately lead to a full bank balance.