2011 Survey–72% of Small Business Owners Lack Financial Controls

The Fremont Group conducts an annual survey of small business owners.  There will be additional posts on other aspects of the survey.  With January posts devoted to financial control of your company we will start releasing results in that area.  SEVENTY-TWO PERCENT OF ALL RESPONDANTS INDICATED THAT THEY NEITHER HAD A BUDGET NOR PROJECTED THEIR CASH FLOW!

  • No regularly produced job costing or tracking reports
  • No regular use of a budget
  • Variance analysis reports are not regularly generated

Is there really any wonder why so many small businesses fail?  Ironically not a single member of The Fremont Group gave any of these responses.

Do you have Financial Control of your company?

Our previous two posts related the need for your two critical financial tools—your budget and your cash flow forecast.  Absent either you do not have financial control of your company, however even with them all you have are the tools.  A red letter rule of our work is that people dependent businesses fail; systems dependent business thrive.  Financial control must be achieved through systems, procedures and controls.  Your budget defines what you can afford; your cash flow forecast when you can afford it.  The entire concept of “what and when you can afford” something can be summed up in a story we tell during our workshops.

A homeless man and a suburban housewife were approaching a Starbucks.  The homeless man had a dollar bill, three quarters and a dime in his pocket.  He looked at the four-dollar coffee and said to himself, “I really want that coffee but I don’t need it.”  He went on without going inside.  The suburban housewife had plenty of money in her checking account and debit card in hand.  She looked at the four-dollar coffee and said to herself, “I really need that cup of coffee.”

The moral of the story—the difference between a want and a need is the balance of your checkbook.

Business owners without real financial control claim to have control by “only buying what we need.”  As you can see, what you need is controlled by the balance of your checkbook.  A large payment comes in from a client and suddenly many of the things that you previously only wanted are now needs.  Cash can never accumulate because your “needs” expand.  Your budget is your financial plan designed to produce a desirable, predetermined result.  This tool is a continuous work in progress.  A system needs to be implemented where each week your Key Variables are tracked against your budget.  Customized to the size and abilities of your staff, this task is delegated to a person who is held accountable for that result.  Your responsibility as owner is the enforcement of that system.  The manager must be trained, given the information that they need to compile the report, and delegated the authority to control the result.

The cash flow forecast monitors the blood in your veins.  Each week the report must be compiled and delivered to you for your review and identification of the adjustments required to maintain a positive result.  Some sense of urgency regarding sales, collections and expenditures can then be delegated with oversight.  Real financial control of your company is achieved through the implementation of systems, procedures and controls that use your two financial tools.  The Success Partners of The Fremont Group work with their clients to develop and implement these customized systems.  Give us a call.

To find out more about Financial Controls log in (first register if you have not—it is free) and do a search for “financial controls”, “cash flow” or “budget.”  You will find numerous other posts on these topics.  During the Annual Physical that we provide our members, with an analysis of the financial control system and an Action Plan for their development.  MEMBERSHIP BENEFITS

How do you project your cash flow?

Each day we are asking a new business owner, “Do you know how much cash you will have in the bank on this Friday?  Next Friday?  Each Friday for the next six weeks?”  Owners can almost never give an answer.  Cash is the lifeblood of your company.  Intelligent decisions require information and the two most important financial documents in your business are your budget and your cash flow.  Your budget tells you what you can afford; your cash flow tells you when you can afford it.  Most owners don’t really know what they can afford or when; they are forced to guess or run their business by “gut feel.”  Fortunately most owners have a pretty good “gut feel” due to having been there for years and working long hours.  Unfortunately this method creates a situation where they can never leave.  I have had owners tell me that it would take 15 years before someone could take their place—about then I remind them that you can become a brain surgeon in eight years and that running this business is not twice as tough as brain surgery!  In a way though they are right—it would be next to impossible for someone else to learn how to run the business the way that they are running it.

Your budget is a financial plan that produces a predetermined, desirable result.  Your cash flow forecast is your pulse.  You need a pulse to stay alive and you need to stay alive to accomplish your desired result. You must be able to make business decisions based upon profit rather than upon cash flow and to do so requires the use of these two tools.  If you don’t have them—call us now!

The Fremont Group has developed a simple, six-week cash flow forecasting tool and makes it available to all small business owners.  We provide it during our Annual Business Physical or if you send us an email we will send it over to you.  It requires ten minutes of work each week to develop a full, one-page report of your projected cash balances for the next six weeks.  The real benefit of this is your ability to make proactive adjustments in your activities so that you remain in a positive cash position.

To find out more about cash flow forecasting, log in (first register if you have not—it is free) and do a search for “cash flow” or “budget.”  You will find numerous other posts on these topics.

A systematic financial review can lead to greater profits

by Mike Rudd

There are several elements within a small business environment that should be analyzed and reviewed to establish potential profitability as compared to current performance.

Financial statement review
In a review, three to five years of financial statements should be analyzed and categorized. Compare the performance of each category within the chart of accounts over the financial review time period. Categories should include types of revenue, variable or direct costs, indirect overhead, general and administrative overhead, debt service and leases.

Break down each dollar amount into a percentage of revenue to determine operational variances within each line item. Review individual circumstances that contribute to variances and their impact on company profitability. Combine the bestperforming percentages to establish the business�s optimal financial performance.

Quantifying financial impact
The financial impact of a business owner�s management practices should be reviewed.

Accounts receivable. Lack of consistent monitoring and specific collection procedures lead to reduced cash flow, restricted access to product and increased borrowing. By reducing the accounts receivable collection cycle, a business is able to increase the amount of cash flow on an annual basis, reduce borrowing and increase profitability.

Inventory analysis. In the case of a stocking distribution company, inventory is one of the single largest assets it has. The management of this asset plays a significant role in the success or failure of the business. Excess inventory on hand reduces profitability due to handling costs, breakage, shrinkage, reduced cash flow and increased borrowing.

Sales and margin mix. The gross margin mix of the individual revenue categories determines the overall margin available to the business for indirect overhead, administrative overhead and profit. If the product revenue mix is skewed toward low margin products or services, then the revenue stream will not compensate for reduced margins. Increased sales could actually lead to decreased profitability.

Break-even pricing. Break-even is the point of revenue generation that has covered the associated variable costs and produced enough gross margin to cover the company�s indirect and administrative overhead. Utilize break-even pricing to understand and create a pricing structure that allows for new product introduction and customer development and takes into consideration the inherent competitive advantage of additional gross margin without the burden of overhead.

Labor incentives. Increase labor productivity by developing and implementing excess profit-based incentive programs, performance job descriptions and management information systems. Average employee productivity can be increased, and the reduced overtime, reduced warranty, scrap and waste expenses, and additional capacity will increase profitability.

Reducing variable or direct costs. A business can reduce material costs by negotiating better terms or pricing, consolidating purchases, utilizing buying groups, committing to one supplier for annual purchases and reducing theft, waste and warranty work.

Review the performance gaps between your business and peers within the industry. Identify gaps in profitability, productivity, costs and financial ratios. That information should be combined with the problem costs associated with the lack of appropriate and consistent systems and controls, in addition to procedures that must be embraced and implemented to achieve desired company profitability.

Each business is unique and should take into account special considerations when establishing its viability.

Clients of The Fremont Group—and particularly those of Team Fremont—do a monthly financial review with our affiliate and find this one of the most critical, long-term benefits of our work.

18 Ways to Improve Cash Flow

Listed below are 18 ways to find cash in your business.  Your answer will not be one of these, it will probably be some combination of all of these.

  1. Inject your own cash as equity
  2. Sell stock to inject other people’s money as equity
  3. Increase Debt
  4. Change terms on debt
  5. Convert short term debt to long term debt
  6. Collect your receivables faster
  7. Change your customer mix and eliminate slow payers
  8. Extend your payables
  9. Reduce your sales/slow your growth
  10. Change your payroll policy to delay employee’s paychecks
  11. Lower inventory
  12. Reduce your overhead
  13. Take deposits
  14. Increase prices
  15. Change terms of your invoices
  16. Factor
  17. Manage the business to a budget that includes cash retention
  18. Fund depreciation

Having said this, the only way to really improve your cash position over the long haul is to earn a profit and methodically retain some of the cash generated from that profit.  If you do not have a plan to do so and the discipline to implement that plan the fact is that it won’t happen.