When business is brisk, it’s tempting to make hay while the sun is shining. If you have an amazing business with a truly unique selling point, that might work out fine. For many businesses though, it is an approach that stores up problems and leads to profits being handed to banks or other finance providers instead of going into the owner’s pocket.
In order to ensure all the hard work during the busy period pays off, business owners must regularly review their finances and financing otherwise, they’ll end up working for someone else without realising it.
Where’s all the money going?
Too many business owners end up asking themselves this question. When sales take off, it’s natural to do everything you can to service them and keep clients happy. After all, that’s the secret to good business.
However, financing a growth phase is not so simple, even when it only involves scaling up production without making dramatic changes. Faced with a spike in demand, it’s easy to justify taking on an extra business loan or diving deep into a business overdraft that was only supposed to bridge the occasional cashflow gap.
Ultimately these options represent further fixed monthly expenses that come off the bottom line. Coupled with the need to pay overtime wages and buy extra materials at short notice, it can mean that all the extra margin being made by those new sales go to lenders, workers and suppliers.
The average SME owner doesn’t want to spend all of his or her time tinkering with financial details and indeed this would be a distraction from their core business activities and entrepreneurialism. Precisely because of this, it is a good idea to schedule regular financial check-ups or financing reviews. This is equally valuable when things are going badly as it is when they are going well, although entrepreneurs tend to be acutely be aware of their financing when their business is not performing. Having a precise handle on the financial position of one’s business at any given time will ultimately ensure that the working capital it optimised and no unforeseen surprises popup.
Finance review basics
• Start with a general review of the business operations: Sitting down and delving into the numbers is always a good practice and will help you spot whether margins are sliding or increasing due to economies of scale, for example.
• Don’t forget cashflow: Even when a business is technically profitable, cash flow can be negative if customers take longer to pay their invoices and suppliers demand their payments sooner. Try to forecast your cashflow needs, weekly, monthly and quarterly and ensure there is ample cover in the company account. Cash is king!
• Consider your financing options: Business owners will usually think carefully about a new financing option if it is a planned one off, but when it is part of an organic growth process they tend to go with what is easily available. If expensive options are chosen, the costs can add up. Working out the real cost of business financing options can be tricky because you are not always comparing like for like – our handy guide will help you.
How often should you review your business financing?
Reviewing your finances as well as your operations is always a valuable exercise. It will help you spot potential cashflow problems as well as identify areas were costs are escalating and money is being diverted from your bottom line.
Scheduling a short but thorough business financing review at least every six months is one way of ensuring you stay on top of things.
Whatever timescale you choose, the key is to stick to it. Don’t put it off because you are busy and don’t compromise by tacking it on to another activity such as doing your accounts. The point of a review is that it acts as a random check on your business. Do it regularly and properly, and it will be a useful safety net that picks up problems early and will help maximise cash profits in the future.