Financial Management
8 Bad Money Habits to Kick – Part 1
David Balwin
CPA | Accountant | Business Advisor
Generally, I am seeing and hearing slight improvement in business confidence now and for the future. This is a great time to take stock of money habits and put in place improvements to strengthen your business. Over four Blogs, we will look at eight money habits business Owners/Managers should make sure are NOT occurring in their business.
Spending without a Budget
When in business, there is a tendency to focus on sales/billable hours and customer service, without always keeping an eye on what it is costing to provide these services and products. It is vital, to ensure success of a business, to operate with a budget. Business owners need to plan and monitor for the money going out as much as for the money coming in.
Businesses owners need to forecast and track expenditure to understand and optimise where the money is going. Businesses owners also need to account for the non regular spending and perhaps put a bit aside for the emergencies.
Carrying a Balance on Credit Cards
Carrying a balance on credit cards is a very expensive way to do business. Even with relatively small amounts owing, add up over time. For example, if a business is carrying $5,000 on a credit facility with a 18% rate, and makes minimum repayments each month, it would take approximately 26 years to pay the debt off at an all up approximate cost of $12,000 (assuming the original debt is never increased, payments are made on time and not fees are incurred).
Consider paying credit balances in full each month. If budgets and cashflows have been developed and are being monitored, utilising credit should be manageable. If an unforeseen situation arose requiring an emergency use of the credit facility, consider not using credit again until the balance is paid in full.
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Keeping the Eye on the Ball
You are working long hours and very hard … that must mean the business is doing well – shouldn’t it?
With 24% of business’s failing in their first year, it is vital that owners/managers keep an eye on the ball …. which means regularly looking at and understanding some key financial reports. It is continuously surprising the number of businesses that either do not regularly produce nor review financial reports. So how do the business owners/managers know where they are at and where they are heading? The simple answer is ….. they don’t.
Following are the suggested minimum reports to produce and review.
Profit & Loss: This report indicates the revenue and expenditure, and therefore the net profit or loss, for a specific period. When preparing the Profit & Loss, not only is the bottom line important, but equally critical is the percentage of each expenditure to sales (not wages to sales).
Cashflow: The cashflow statement shows all sources and uses of a business’s money during the accounting period. Businesses that have not or do not produce cashflow statements are unlikely to know of cashflow problems until they physically happen. This statement is fundamental to the good health of any business.
Balance Sheet: The balance sheet is based on this equation: assets = liabilities + owners’ equity. It lists everything the company owns (assets), everything the company owes (liabilities) and the value of the owners’ ownership stake in the company (owners’ equity, or capital).
Budget: Budgeting is the process of trying various mixtures of resource allocation, until one particular combination emerges which best meets the spirit, direction and outcomes in view of the goals and objectives of the business. When a budget is completed (refer “At a Glance” (in the margin left) for tips on developing a Budget) it is critical to monitor progress against the budget to make any necessary adjustments sooner rather than later (when their may not be sufficient resources to allocate). With history, budgeting becomes more robust in businesses as fixed costs become more routine and planning for potential recurring costs more sound.
Debtors: Debtors are people who owe the business money (also referred to as “accounts receivable”). It is important to monitor debtors particularly those not paying. Good business practice includes communicating the terms of debtor arrangements clearly before allowing a payment on credit. All businesses have a clear legal obligation to be able to meet debts as they occur. Therefore, it is critical that all businesses have funds available to meet their costs. If businesses have debtors outstanding for lengthy periods, then businesses’ ability to pay its debts is strained.
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Why Manage Cashflow
CPA | Accountant | Business Advisor
One of the biggest issues many small businesses will face is their failure to plan how much cash they will need in the foreseeable future. Therefore, planning needs to occur in relation to how much cash the business will need (preferably over the next 12 month period) and how the business’s current practices can be improved to enhance the forecasted cashflow. As a starting point business owners need to sit down and map out, on at least a month to month basis, what the expected cash the business will need to meet commitments and what the expected cash the business will generate from sales or services. Businesses need to be as honest and as accurate as possible, including all revenue and expenses items; for example,
List Revenue (including cash from):
- Sale of goods and/or rendering of services;
- Royalties, commission, fees;
- An insurance entity for claims, annuities and other policy benefits;
- Tax refunds;
- Receipts from contracts;
- sale of property, plant equipment,
- sales of equity; and
- receipts from repayment from loans made to other parties;
List Expenses/outgoings (including cash for):
- payments to suppliers;
- payments for bank charges;
- payments to employee including PAYG, superannuation, leave loading and long service (if taken in forward period);
- payments for insurance policies for building/contents/stock/loss of wages, workers compensation;
- payments due under contracts;
- payments to acquire property or equipment;
- cash advances or loans made;
- payments to owners where redeeming equity; and
- mortgage, lease payments.
This list is not exhaustive, however, hopefully gets the thinking juices going about where businesses’ money can go. A great resource for working up these lists is the last 12 months cashflow of the business.
Also, make sure the one-off payments and receipts are not forgotten – they could, in the case of receipts, get you over the line in a tight period or, in the case of a payment, cause the business severe stress if not planned for and suddenly appears.
Once expenses/payments and receipts have been allocated to the relevant month the business is now in a position to see where it stands.
How does it look? Is enough revenue being generated to cover costs over the period (including salary for the business owner/s)? Are there any months where expenses are greater then receipts and has the business sufficient reserves to meet the shortfall?
If the business needs short term funding for a period during the year, now is the time to plan the best way to meet the shortfall: not when it happens! By planning and researching options, the business will have a far greater chance of securing the required funding at the best rate, in time to meet payments.
Remember, even though things are good and the business is generating positive monthly revenue, there maybe something lurking around the corner that is out of direct control. By ensuring access to other funds (e.g. overdraft/loan) or even better still the business’s own reserves that have been put aside during the goods times, the business has a far greater chance of surviving.
By having a proactive cash flow projection based on sound numbers, which is constantly reviewed and adjusted for changes in financial circumstances, the business is in a good position to achieve the desired result. Remember to always seek professional advice from properly qualified people as part of your business strategy. It is always a good idea for the business to discuss any issues or management matters with its accountant, legal advisor, financial adviser, financial institution and/or other business professional, well in advance.
