Financial management tips

To grow or not to grow

Most businesses reach a point where they need to make a choice: To grow or not to grow? It sounds simple. After all, who wouldn’t want to grow? But the truth is that with growth comes complexity – particularly around financial management.

Here are 6 ways to ensure your business stays financially on track while you focus on growth.

1. Embrace a lean philosophy

Successful businesses keep things lean. Every expense is tracked, and there’s no unnecessary expenditure.

There are a number of ways to curb your expenses:

• Review what you are spending on rent. Do you require so much office space? Perhaps your employees can ‘hotdesk’ or you can move to a co-working space.
• Have you migrated to the Cloud? If possible, move everything into the Cloud. It saves you the expense of running servers, and allows your team to work remotely.
• Outsource where you can. If it’s directly related to how you make money (your IP, product or service) you shouldn’t outsource it. Everything else can be. Outsourcing also allows you to access experts without salary overheads.
• Don’t lock yourself into long-term contracts or leases. Stick to short-term leases and pay-as-you-go pricing keeps control in your hands.
• Review every line item on your profit and loss statement. Check everything and cancel what you don’t need such as phone contracts for employees who have left, software licenses and member fees that are no longer needed.

CASE IN POINT:

• When Dial-a-Nerd first hit a growth phase, they were still focused on a mix between hardware sales (selling computers, laptops and other IT equipment) and services.
• The problem was that hardware sales required stores, and so they were opening stores and offices across the country. The problem was that stores are expensive: high rentals and high overheads.
• The more stores they opened, the more their margins shrank.
• When co-founders Colin Thornton and Aaron Thornton realised that the cost of hardware sales didn’t make sense, they repositioned the business as a service-only business, and moved into much more functional, less flashy offices.
• The result? Profits soared.

2. Build up your cash reserves

Cash flow is the lifeblood of any business. Profits on paper are meaningless unless your customers have paid you. Being owed money doesn’t help when you need to pay salaries, overheads and suppliers.

Healthy businesses have strong cash reserves that can be used to grow the business or cover unexpected expenses.

The key to building up cash reserves is to ensure that more cash is coming into your business than you are spending.

• Ensure your cost of sale isn’t too high and that your price point is correct.
• Keep your expenses as low as possible.
• Make sure money is coming into your business before you need to spend it. Ask customers to pay upfront or on 30-days where possible, and negotiate to only pay your suppliers on 45 or 60 days. This ensures you don’t need to use debt funding to cover expenses.
• Save your extra cash.

Consider debt financing or equity financing

Not all debt is bad. In fact, some debt is healthy for your business – particularly if you’re focused on growth.

Unhealthy or bad debt is used to finance things that your cash flow should be covering such as salaries, overheads and suppliers.

Healthy debt on the other hand is used to finance growth, such as:

• Materials for a large order
• Importing or purchasing products
• Purchasing additional equipment to expand your operations and service new customers.

Remember, there is a cost to accessing finance. Use the funds to grow your business and not to cover debts.

Here’s what to consider when you’re thinking about debt or equity finance:

• Do you want debt or equity funding? Debt funding is repaid. Equity funding gives ownership of shares to the funder. This makes them an equity partner, or part-owner of your business.
• What will the finance be used for? Is this a growth play? Does it make sense to invest in your business right now? Do you have the clients lined up for the additional investment to make sense?
• Can you service the loan? If you’re purchasing a large new machine, for example, how many more clients will you be able to service or how many more products will you be able to manufacture? Will the additional sales cover the finance debt?

4. Keep a keen eye on the financials

Healthy businesses are run by owners and management teams who keep a keen eye on the financials.

Know your costs

Margins fluctuate. You will have some fixed costs, but others will be variable. If there are any big shifts, investigate why. Also ensure that you have accounted for variable costs in your financial planning.

Keep watch for red flags

When reviewing your income statement, don’t include revenue before it is earned and don’t record incomplete sales (if the sale is tied to a condition that has not yet been delivered, for example).

When reviewing your expense statement, keep an eye out for inconsistent expenses and large fluctuations month-on-month. Also ensure that your expenses don’t go higher than your income.

For more insights into how to improve your financials in your business, read our guide, Seven ways to whip your business financials into shape.

5. Ensure your collections function is tip top

Your ultimate goal as a business owner is to make more money than you spend. When you design your invoicing and payments process, keep the following top of mind:

• Avoid bad debts by checking credit history and references before extending credit terms to customers
• Invoice correctly and on time
• Follow-up on unpaid invoices
• Incentivise customers to pay upfront

To find out more about designing a robust cash management system, read our guide on cash flow mistakes to avoid.

6. Get the best financial muscle possible

There are a number of ways to do this. You can outsource to financial experts on a monthly retainer basis or hire top financial employees.

The thing to remember is this: Investing in good, solid financial management will make you much more than it costs you in the long run. This isn’t an area to cut costs if you can avoid it.

If you are not a financially-savvy or experienced person, upskill yourself as much as possible. You don’t need to become an accountant, but there are many financial courses for business owners available. The more you understand your numbers, the healthier your business will be.

“We lost a lot of time and resources thinking small. If we’d invested in a top financial director sooner, we would have spent a few hundred thousand – but saved a few million through smart financial insights.” Ran Neu-Ner and Gil Oved, co-founders, The Creative Counsel

Gil Oved and Ran Neu-Ner believe that one of the biggest errors they made in building The Creative Counsel was not putting a proper finance department in place sooner.

Here’s why:

• The difference in cost to company between a mediocre employee and the best in the market is about 20%
• The difference in output, however, is 100%
• Ran and Gil learnt to just pay the money
• The mistakes that a good financial director stops you from making can significantly improve your bottom line