Knowing how to manage your business through these uncertain times is arguably one of the key skills that all business owners need today, but few may have. I have outlined here some of the main points you need to be aware of to know you are successfully managing your business.
Firstly, know what stage your business is at, know what information you want to have at your fingertips, and be willing to work with your accountants, not against them.
Recognising which stage your business is at is crucial to knowing what information and support systems you need in place to manage it successfully. Your accountant is the single most important element in putting in place a workable effective control system for your business.
So how do you deal with your accountant? Do insist on jargon free explanations of all financial information. Do be clear what the key cost and income drivers are within your business and ask to have a simple financial recording system to monitor these key figures. Be willing to keep detailed records of all transactions in the business. Keep your accountant informed of all developments or changes within the business. Be willing to set annual/quarterly targets and to monitor progress. Provide your accountant with accurate stock/work-in-progress figures for management accounts
Your accountant should be providing you with
- monthly/quarterly management accounts, detailed margin analysis, and comparisons against budget.
- Budgeting and financial planning information
- Capital investment information
- Dealing with banks and other lenders
- Dealing with the Revenue Commissioners and Companies Registration Office.
What stage is your business at?
If you are still in the start-up phase, 1 to 3 years, typically you are:
- A one man band
- Under capitalised, which means not well financed at the start
- No financial reserves to fall back on
- Inexperienced in being in business
- Trying to cope with everything
- Still establishing a place in the market
If you are in the 3 to 5 year stage, typically you are:
- Learning how to manage employees effectively
- Learning to delegate, which most business owners really struggle with
- Coping with rising overhead costs
- Overtrading, where your business grows quicker than your profits
- Doing crisis management
If you are in business between 5 to 10 years, typically you are
- Financing expansion and growth
- Trying to maintain competitiveness
- Controlling a growing business
- Struggling with indecision on the future path of the business
A Sample of Critical Items for one-page financial management information
The following items should be tracked against one another, and taking into account the figure for the current period, the year to date, and the previous year to date.
- Sales net of vat (by key analysis if relevant e.g. geographical, product etc.)
- Cost of Sales: analysed over key items e.g. Materials, production wages, consumables etc., each expressed as a percentage of sales
- Gross Profit and Gross Profit Percentage
- Key Overheads as a Percentage of Sales
- Net Profit as a Percentage of Sales
- Debtor Days
- Creditor Days
- Stock Holding Days
- Bank Position
- Other items which can be included are total loan repayment or loan balance, and PAYE/PRSI/VAT
Remember, a one-page summary of the key figures in your business is all you need on a monthly basis, you don’t need management accounts running to 6 or 7 pages simply because it is easier for your accountant to use the same format as the annual accounts. Have a one page report, which tells you what you need to know. Your accountant will help you decide what is most useful for you.
Shown is a list of the standard items which should be on a one page summary of your financial information. If you prepare budgets each year then a column for budget and variance from budget should be included. In looking at the range of information which different businesses want to have included on a financial management report, the key seems to be that if it’s relevant to your business then include it, if not leave it out. The main thing is to keep it simple, otherwise it won’t get done.
There are increasing burdens on business owners, increasing legal responsibilities on Directors and owner-managers regarding compliance with taxation and reporting legislation. And then there is the increasing practical need of real-time financial information on business performance, costing and pricing of products and services, risk and return on incremental growth and investment.
Managing all of these pressures is crucial to surviving the pitfalls of the small business. As a second generation Accountancy practice we have identified these pitfalls as common to every small business. One of the key causes of business failure in small business is the proprietor’s inexperience in basic business skills, the gaining of experience in this area has an inherent time element and the small business proprietor is always short on time. Use the expertise available to you in your accountant, make it work for you, to give you what you want and what suits your particular business life cycle stage.