Picture for a moment having access to a high calibre part-time FD who looks after the finances of your business…
With the above picture in your mind, I want to take a moment of your time to run through the approach I would take with your business. This all begins with understanding what your business is about and your motivations.
Understanding you and your business
I first begin by looking to understand you and your motivations, plus I like to get to know a bit more about your business.
Starting with the end in mind is where I like to begin. What is it you are looking to achieve from having an interim or part-time FD on board? Do you have a plan or a vision? Are you in crisis or do you have cash flow difficulties? Are you in transition or are you growing fast and finding it difficult to keep up with the fast pace? Are your systems and processes keeping up with the growth of your business? Are you looking to raise finance from a bank or an outside investor?
Before I start to look at your finances in more detail, it’s important to know where you are right now with your business. It’s vital to understand what it is you are looking to achieve and what your plans are for the future.
Where you are now and where you want to go both have a bearing on the approach I will take with you. This is because although some of the basics will be the same, where and how we begin may be different.
If for example, your business is in crisis it may need me to quickly roll my sleeves up and get stuck in right away. Versus if your business is growing rapidly and struggling with cash flow we will begin by taking stock and look at the options open to you. But also if you’re looking to prepare your business for an exit, this will require more time looking at the plan and thinking strategically.
Whichever of these aspects describes your business will determine how we start. Once I understand more about your business and what motivates you, the next stage would be to get a better understanding of your finances.
Understanding the numbers
The finances of your business are extremely important to understand. This requires them to be up to date and to have monthly management accounts, ideally produced to an audit standard each and every month.
I would work with your in-house or outsourced finance team to make sure the accounting software and the processes you have in your business are how they should be. If they’re not, once I understand how your business works, I would work with you to improve the systems and make suggestions of the changes you should make.
The importance of entering data just once will be addressed. Many businesses have a mixture of systems, where most don’t ‘talk’ to one another (i.e. data is not transferred automatically), so data is entered multiple times. If this describes your business, this is an area we can look at together. Duplicating data entry wastes time, costs money and is open to more errors.
A sample of what I would look at as a part of this review include:
- Carrying out a review of your assets, including vehicles, plant and equipment, machinery and so on. How are these financed and are there any opportunities for improvements.
- Carry out a review of your banking facilities, cash flows and where required prepare cash flow forecasts. This review would be to identify any future shortfalls in cash to understand whether any funding is necessary for the business.
- I would look at your invoicing and collections procedure. Are there any quick wins in this department. How quickly is your business raising invoices and how robust is your collections process.
- Review your stock and stock control procedures. It’s important to review whether or not your business is holding the correct levels of stock and not using up vital working capital by carrying excess stock.
- A review of your suppliers and payment terms, which would include how suppliers are currently being paid in accordance with their terms.
- I’d carry out a review of your tax compliance with regards to PAYE, VAT and corporation tax.
- A review of your loans and overdrafts to understand what your company owes and over what period. Are there any opportunities to reduce borrowing costs or to rearrange loans to help with cash flow?
- A full review of your profit and loss will be carried out, which would take into account your business’s gross profit margin, net profit margin and a review of overheads and any variances from one year to the next, but then this would be reviewed on a monthly basis as a part of the management accounts procedure.
Monthly reporting and the fundamental reports
There are three key reports you should have at the end of each and every month. These include your balance sheet, your profit and loss report and a Cash Flow Statement for your business.
The balance sheet reveals the overall health of your business. It summarises the assets, the liabilities and business profit and equity. Monthly metrics can be measured from your balance sheet comparing current assets vs current liabilities. Your company balance sheet will be partly what’s used by banks or investors to determine the viability of your business.
Your profit and loss account is the main report used to gauge the business’s profitability. This report is a useful tool for looking at ways in which your profit can be improved, expenses can be reduced and profit margins increased.
Finally, the Cash Flow Statement shows how your company spends its cash each month. This report shows all of your cash inflows and all of your cash outflows. So if you’re like most business owners who always wonder where all the cash has gone, despite being profitable, this report will reveal this to you.
Identifying key performance indicators
Once the basics have been mastered with your business numbers, we can start to look at important key performance indicators or KPIs to monitor.
KPIs are important goals to set for them to be monitored how well the business is performing against those goals.
If your business monitors the right key performance indicators you are able to make smarter financial decisions. But KPIs aren’t only financial and should include those that track customer related performance too.
Once I have a better understanding of your business, we can sit down and begin to work on which KPIs to track, monitor and manage.
Performing a SWOT analysis on you and your business
It’s always a good idea to review your strengths, weaknesses, opportunities and threats both for your business and for you personally.
Looking at a SWOT analysis on your business provides an excellent backdrop to how to approach a business plan. What are your business’s strengths that could be built upon? By identifying the weaknesses in your business will provide a platform to workout how to addresses them.
Similarly with regards to opportunities and threats, we can look at how you can capitalise on the opportunities open to your business, whilst identifying the threats and putting in safeguards to avoid them.
Performing a SWOT analysis for yourself will identify your strengths and where you should focus your time, but also your weaknesses and how these can be avoided by recruiting the right team underneath you. No one likes to admit to weakness, but if you do this it will empower you and it creates opportunities to further strengthen your business.
Profit improvement
Having a higher profit increases the value of your business because most business valuations work on a profit multiple. It is therefore in your interest to maximise your business’s profits.
Higher profits allows you to reward your staff better and provides more money to reinvest in the business. Banks and investors also love profitable businesses and higher profits provides an opportunity for reduced borrowing rates.
Profit is the result of many inputs. Profit is an outcome. So if we take time to look at each one of the inputs that have an affect on the outcome, we stand a better chance of focusing on what has the biggest impact.
It’s important to review your key profit drivers, which includes your average transaction value (i.e. how much on average a customer spends with you each time they buy from your business). It also includes the number of times existing customers return to buy from you. Other metrics would include your customer defection rate, website and sales conversions too.
I would use my in-house designed Increase Profit Software to review your current position with regards to your profit metrics, but then review what targets could be set to increase these.
Cash flow review
I always say that ‘water is to life, as cash is to business.’ Cash flow is the bane of most entrepreneurs. You can have the most profitable company in the world, but if you run out of cash you will go out of business.
If you are having cash flow problems, this is something that we can looked at together. There are many reasons for cash flow problems and in many cases this can be down to not collecting amounts owed by customers on time.
If your business is growing fast, then I would hazard a guess and say you are probably experiencing cash flow difficulties. This is unless you are collecting your money upfront from your customers.
The problem you have if you business is in growth is the time lag between you paying out for the goods and your customers paying you for them. In the worst case scenarios, this can lead to over trading, which in turn can cause a business to fail, as they simply run out of cash.
Another reason for businesses running out of cash is because they hold too much stock. If your business holds stock, do you have a good stock management system in place to monitor the ins and outs of stock. Do you know the optimum time to order each stock item and how much to hold at any one time?
Funding for your business
Picture having an experienced finance expert holding your had through the maize of funding opportunities. Imagine having a person who will make sure your accounts are in good order, cash flows and business plans are prepared and then there to run through the advantages and disadvantages of each time of funding source.
There’s probably never been a better time for you to raise funding for your business. There are more and more sources opening up all the time, which are in addition to the traditional high street banks.
The decision you will need to make is whether you are happy to give away equity in your company (I.e. an investor invests money for shares in your business), or if you would prefer to borrow money instead.
Whether you raise equity or debt finance will be down to you and how you feel about it. The funding route you take will be affected by how much you want to raise and what the funding is for.
On the whole equity is usually more expensive than debt finance, but you’ll probably be able to raise more money via equity and grow faster than you would using debt.
Planning ahead in your business
Imagine what it would be like to have a strategic business plan for your business. Think about the different it would make to your business if you had a proper timetable to follow. Also imaging how your business could join all those more profitable businesses that have a business plan.
The benefits you could enjoy by having a business plan are many fold. The most obvious one is simple in concept, but important it practice. Imagine trying to play the game of darts, but without a dart board. You’d not have a target to hit and the game wouldn’t have much of a point.
The same is true for business, if you don’t have a business plan written and something to target for your business, it’s much more difficult to get direction, opportunities will be missed and they’ll be reduced satisfaction on your part from running the business. Setting goals and achieving them is great for you and will provide you with a real sense of achievement.
It’s also extremely important for you to recognise milestones and goals achieved by celebrating in the success.
But also, if you have a plan, but the plan is hidden away in a drawer, then you may as well not have a plan in the first place.
Compliance review
If you hate compliance, be it for HR, HMRC, data security or for health and safety, imagine instead having someone to review this for you. If your business isn’t compliant in any one or all of these areas, this could cost you significantly more in fines than it will cost to put it right.
There are many benefits outside of the avoidance of fines though for getting your compliance side of your business right. For one it will increase the value of your business. Buyers of businesses love businesses that are compliant. This will mean there’s less chance of them inheriting a problem in the future.
Much of the compliance can also be outsourced too. Take HR for example, this is very easy to outsource to a third party to make sure your employment contracts are up to date and legal, your employee handbook is complete and you’ll have included a help desk to help with any employment issues too.
Planning your exit
Even if you’re not considering your exit route right now, at some point in the future you will need to pass your business on. This may be to your family, but equally it may be to an outside purchaser.
If it’s your intention to exit your business via a sale, it’s important to get your business in the best shape for a sale. You want the sale to be on your terms and at a time of your own choosing too.
There are many things that can be done within your business which will make it more salable to a third party. Why not start this process early, as you never know when you might be approached.