It is reported that higher performing SMEs are more likely to have a finance function that drives cost reduction, therefore is measured on its efficiency and continuously strives to improve the accounting process. In order to drive performance, you need to review all of the key performance indicators, such as gross margins, labour costs and overheads. Obviously, every business industry has different gross margins but what is important is that business owners monitor their key performance indicators on a monthly basis in order to understand the financial efficiency of their business.
Here are some simple steps to ensure your business is a lean, mean, money-making machine.
- Have a strategic plan
- Don’t dismiss the boring stuff
- Monitor cash flow
The purpose of strategic planning
The purpose is to set overall goals for your business and to develop a plan to achieve them. You need to ask yourself where your business is heading and what the priorities should be.
If you are planning on growing your business, you should invest time to identify exactly how you plan to expand and how you will achieve it. By doing so, you can manage the risks that come with growth.
Don’t forget to review the boring stuff
It is so important to regularly review the ‘boring stuff’, such as purchasing and labour costs. Do you always buy from the same supplier because it is convenient? By undertaking some simple research, you are likely to find the same product at a lower cost from another supplier. It makes sense to shop around. Labour costs are usually the most significant cost of a business. These costs should be reviewed on a regular basis and if appropriate steps should be put in place to reduce the costs i.e. if employees are earning more than what would be paid for their jobs in today’s market, then it may be idea not to increase salaries until they come into line with current trends. In order to ensure that your staff are working efficiently make sure that they have adequate training and if possible, there should be established and written procedures that employees can use to make their jobs easier. If you provide your employees with the tools they need and create efficient processes, this will help reduce labor costs.
Monitor cash flow
No business can survive without cash. It is important that invoices are generated and sent to customers on a regular basis but more importantly payment should be chased. It may be appropriate to send a reminder seven days before payment is due. If payment is not received within the agreed payment terms, then send a letter advising that the matter will be passed to debt collectors if the funds are not received within seven days.
Business owners should prepare yearly cash flow forecasts and these should be monitored on a monthly basis. This is essential to help plan for future events and unforeseen issues. By preparing and monitoring regular cash flow forecasts, this will help identify when cash is coming in and if there are likely to be any cash flow difficulties in the immediate future. If so, this will allow sufficient time to plan as to how to deal with those issues.
For further information, download our guide on how to deal with a cash flow emergency.