Do you like surprises? Not the kind where you open the front door to 50 of your best friends singing Happy Birthday. Not even the kind where you get an unexpected gift or honor. The kind of surprise you probably really don’t like at all: dropping sales, lower traffic, less profit, shrinking margins, and especially dwindling cash.
In small business there are going to be plenty of surprises affecting all of these important elements. Economic conditions, weather, a new competitor, a bad Yelp review or two or three, and you can be faced with lower activity and even losses.
One great goal for any company might be to reduce surprises to a minimum. To some extent you may be able to do this by paying careful attention to national and regional financial news, industry trends and news, and asking a lot of questions of reps who call on you regarding local conditions such as new competitors.
You can reduce surprises by keeping accurate records of prior years, and then budgeting your expectations for the coming year. As noted in an earlier post on counting, you can count dozens of critical elements about your business, and then create budgets for each. For the purposes of this post, we want to drill down on the most important elements that should be watched carefully, and why.
Janet runs a motorcycle helmet distribution company. She knows that the business is seasonal, but she still runs out of money and gets behind in paying her bills every January. Her tax preparer can show her that the company is profitable, and she takes home a reasonable salary, but the cycle repeats itself every year. Just when she needs to buy inventory for the coming season, she is in a battle with her suppliers over her past due invoices.
Janet, like many other business owners, pays little to no attention to her financial statements, and makes no effort to budget. A few minor changes in her methods, much of which can be automated by an outside bookkeeper or accountant like ATPP, and she will solve this problem.
First, she wants to receive a sales analysis by month. This should show at least two prior years, preferably three. This is very simple to create, and the report might look like this.
Next she should ask to receive a very similar report on profits by month for the same period.
Because she offers her customers payment terms, much of her cash from sales is delayed by 30 days or more. Therefore she wants to have another similar report for cash receipts by month. This could also have a second report attached that would show cash receipts less overhead expenses by month. This will show cash flow other than purchases.
Do you begin to see how powerful these tools would be for Janet to plan her cash?
There is a much more sophisticated report called a cash flow analysis. This would take into consideration purchases, payables, and every other aspect of the business that impacts cash. But because it is sophisticated, it can be daunting to some users. By sticking with the simple reports above, almost anyone can see the trends and try to correct for them.
Janet could immediately see options that could help her through that tough spot each year.
- Reduce purchases earlier so that payment to suppliers would be paid by the time she needed to buy more.
- Reduce overhead earlier and more drastically so as to not use up funds during the waning sales months when the workload was too light for so many employees. This could be done by layoffs in slow times, or by using temporary workers in the better months.
- Get a line of credit to pay off suppliers
- Become much more aggressive about collecting accounts receivable during the end of the season, before things slow down for her customers.
- Build up a larger cash reserve by reducing some spending during the year. This reduction might come out of overhead or capital spending accounts. Don’t buy the new computer system or programs for one year.
Since Janet’s payables problem was generally only about $100,000 (she owed $100,000 past due on her payables), she was able to solve this by cutting $20,000 in expenses during the year to build cash, reducing purchases early by $30,000 to reduce payables, increase collections of receivables by $10,000, and getting a line of credit for $35,000. She was still past due by $15,000, but this was manageable through working and communicating with her suppliers.
The next year she saved another $20,000 during the year and was in great shape going into the next season.
She figured her total time expense of reviewing the reports to be about 5 hours per year.
If financial reporting like this would help you in your company, ATPP can help. Call for a quotation for the specific reporting that will add to your bottom line. Call 818-436-2775.