With the end of financial year just around the corner, it’s a great time to consider the results for this year and what you want to achieve next year.
There is an old saying “If you aim at nothing you will hit the target with amazing accuracy”. If you want to improve the results in your business a target to aim for and a system for monitoring progress is a great start.
As a business owner here are a few questions to ask at this time of year:
- How were our results against target for this year?
- Did we have a target for this year?
- Are we happy with the results for this year?
- How accurate are the results for this year?
- What do we want to achieve next year?
- What can we learn from this year to improve next year’s results?
It can be difficult to find the time to consider these issues when you’re busy running a business, but a small amount of time spent now can pay big dividends to your results next year.
Here are a few ‘key issues’ to consider and get control of:
- Compare Results: Have a budget i.e. something to compare actual results against, that way you have a regular procedure for checking income and costs are on track. You can see very quickly if margins are slipping, find out why and take corrective action.
- Identify Overspending: If you don’t have a monthly budget you may not find out until way after the financial year (sometimes eighteen months later, if you rely on accounts produced for tax) that you have overspent on some items.
Imagine if you had a small number of items of overspending that added up to say $1,000 per month. If you left it until tax accounts are prepared it could cost you $18,000 in lost profits.
With a monthly budget you can identify overspending quickly and take action to fix it. A budget can be entered into most accounting software systems and a ‘Budget versus Actual’ Profit and Loss can be printed so that you can easily see any variances and manage them.
- Spending Limits: A budget lets your staff know there are limits on spending. It’s amazing how some staff will keep spending if they don’t have a limit.
Tip: A really valuable tool to use here is a ‘Purchase Order’. This is a one-page document that is completed by staff wanting to order/buy something over a value of say $100, that needs to be authorized by a senior manager prior to order placement.
The value of this tool is that the senior manager may know something the person ordering doesn’t know, such as obsolescence or a better way of achieving the result. This can save literally thousands of dollars every year!
- Resources: A budget helps you to plan what resources will be required to achieve the sales you plan.
It’s important to match the outgoings with the income and plan what resources will be necessary. Thus avoiding ‘Crisis Management’ which is no good for morale.
- Funding: If you want to acquire new business funding or ‘roll over’ current lending, you will definitely be required to produce a Budget and probably a Business Plan.
A lending institution needs to be confident you have ‘thought through’ your business and funding requirements. If they can see that you regularly measure actual versus budgeted results they will feel much more comfortable with you as a borrower.
- Break-Even: Some people say “It’s too hard to do a budget because I can’t predict what I will sell”.
However, most businesses know what their direct costs and overheads are, so it should be possible to calculate the “Break-even” point. ‘Break-even’ means the level of income you need to cover costs and overheads i.e. not making a profit or a loss but a $0 result.
By knowing your break-even point this puts you in a good position to target sales for profit and create targets for individual people, departments, regions etc.
Anything you can do to increase the Net Profit can have a big impact on the value of your business. As many businesses are sold on a multiple of EBIT (Earnings Before Interest and Tax), it makes sense to increase this result.
Many businesses have been run in the past with the aim being to minimise tax, but this isn’t a good strategy if you want to sell your business in order to retire or do something else. Multiples of EBIT vary depending on the industry and business management, but say it is three – this means that for every extra dollar you can add onto Net Profit, that would be three dollars added onto the value of the business. If you could increase your profit from $100,000 to $200,000 you would add an extra $300,000 onto the sale price and potential contribution into your superannuation fund on retirement or exit from the business.
It makes sense to invest a little time planning for the profit you want to make in your business and reap the increased business value benefits down the track.
If you would like a ‘kick start’ to producing a simple Budget CFO On-Call has a ‘Budget Tips Sheet’ that can help you on your path to better Profit and Cash flow!
About the Author
Sue Hirst is the head of CFO On-Call, a team of Financial and Business Advisors who work with open-minded people committed to business growth and achieving success.