The secret to a successful business is to make sure you are not just working IN your business but that you are also working ON your business. As we settle into the new financial year, there’s no better time to give your business a financial fitness check.
Of course, the best policy is to continually monitor how your business is faring throughout the year. But if you’ve been caught up in the day to day management then now is a good time to get back on track.
How do you compare?
There are a number of ways to work out just how well your business is faring but an easy first step is to use the Australian Tax Office’s (ATO) small business benchmarks.
This tool lets you compare your business with others in your industry using appropriate benchmarks such as turnover range and expenses.
If you are outside the benchmarks, whether above or below, then it may be worthwhile looking at such things as the rate you pay for inputs, the price you sell, the level of inventory you carry or whether you are reporting your expenses accurately. The benchmarks are also a guide for the ATO to quickly identify who is trading outside the norms and determine where to direct additional scrutiny.
Check your ratios
Financial ratios are another useful method to determine fitness. You can check your business’ liquidity, solvency, profitability, management and balance sheet through ratios.
For example, working out your solvency ratios shows how easily you can meet your debt obligations from sources other than cash flow. Management ratios can identify how quickly you can replace stock, how often you collect debts and how frequently you pay your suppliers.
We can help you calculate and interpret these ratios for your future planning.
Key warning signs
Generally, there are five key warning signs that your business is not performing well and could be heading for trouble. These are:
- an inability to pay debts
- poor profitability
- no access to finance
- high staff turnover
- inadequate financial records.
If any of these are occurring in your company, then we can help you make changes to rectify the situation.
For instance, if you are facing difficulty paying your bills, it may be time to improve your cash flow either by selling old stock at a discount, chasing outstanding debts or talking to your bank to alleviate your situation. Looking forward, you could prepare weekly cash flow forecasts so you control your outgoings and income.
If your profitability appears to be failing, take a look at what may have triggered this state of affairs. Perhaps you are failing to pass on cost increases sufficiently to your customers or maybe you are carrying more staff than your turnover can support.
If your issue is high staff turnover, then focus on the attributes you want in new employees and develop a recruitment plan. You might also consider ways to improve employee engagement, such as encouraging and rewarding them to put forward ideas to improve the business.
In a challenging business environment, all businesses can be at risk of failure. The key is to manage your risk.
Risks can come in many forms – strategic, compliance, financial, operational, environmental and reputational. Today’s businesses are also facing new challenges, from structural changes in their industry to cybercrime and the potential for disgruntled customers to damage your reputation in online forums.
By recognising the risks your business is exposed to and having a strategy, you can head off problems before they become critical. What’s more, you may be able to use your relative strength to take advantage of opportunities in the marketplace.
Even if you are confident your business is fundamentally sound, constant financial monitoring will ensure it stays that way. If you would like assistance in determining how your business is shaping up, give us a call on 03 5443 0344 to get started.