5 Ways Your Financials Can Help You Run Your Business Better

Sage IntelligenceFinancial Savvy for Small Business Owners

5 Ways Your Financials Can Help You Run Your Business Better


Table of contentsIntroduction 3

Knowing your cash inflows and outflows now and in the future 4

Making your budgeting and forecasting work for you 5

Understanding your sales trends to drive success 7

Effectively managing your debtors 9

Tracking the overall health of your business 10

Conclusion 11

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IntroductionEvery entrepreneur wants their business to succeed: that is, after all, why they’re in business. That said, it’s common knowledge that most start-up businesses fail within the first five years. A combination of factors contribute to this but many of them can be overcome. For example, technology puts so much social and organizational data at our disposal, it is difficult to figure out how to manage it all.

As a small business owner, you are probably inundated with information. How do you make sense of it all and find the time to effectively manage multiple projects, relationships, and business opportunities. How do you keep our finger on the pulse? The key to success can often be as simple as making sense of all that information.

Data is growing at a rate of 56% year-on-year (Aberdeen Group, Data Management for BI: Getting Accurate Decisions from Big Data, 2013) yet 42% of businesses admit that many decisions are based on inaccurate/incomplete data (Aberdeen Group, ERP and BI in the SMB: Bringing Light to Data in the Shadows, 2013). This means that although businesses have more data, they don’t know how to get good information out of it.

The single most important thing you can do to succeed in business is to manage your financial data. It is the canny entrepreneur’s best friend, you simply need to understand how to organize and view it quickly and easily so that the numbers make sense. This doesn’t need to be as complicated as many entrepreneurs assume. You don’t need a degree in accounting. You don’t need to be good with numbers. You don’t need to stop being a maverick. In fact, if you approach your financial data in the right way, you will quickly understand how to make sense of it and use it to make better business decisions.

One of the best ways to do this is to make use of Business Intelligence (BI) or reporting tools such as Sage Intelligence to help you. In its simplest form, BI is the ability to accumulate, organize, and analyze data in a useable format to give you better business insight, which allows you to make informed business decisions, which can give your company a competitive edge.

Here we detail some basic financial knowledge that any small business owner should get to grips with. Taken together, these five points give you guidance on financial intelligence that can help you not just survive, but thrive.

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Knowing your cash inflows and outflows now and in the futureAt its most basic, cash flow is simply about how available your cash is to you, which is mostly a factor of how well you manage your debtors and how far you can stretch your creditors. For most businesses, if debtors only pay on 120 days you’re obviously not in a position to promise creditors 30 days, but this does depend very much on what kind of business you’re in. If you buy stock on a seasonal basis only three or four times a year, then you may not need to stretch your creditors too far. If your stock is intellectual property rather than physical goods, then you have more flexibility. It’s a question of managing your cash in the right way for your business model.

Think of cash flow as the net effect of the following questions: what money is coming in when, and what money is going out when? Knowing the answers is the quickest and clearest indicator of whether you’re getting into trouble, so cash in and cash out needs to be monitored regularly. You can’t just hope that it’s coming: cash is not yours until it’s in your bank, free and clear. Ultimately you want to reach a stage where you always have a cash buffer zone that leaves you feeling comfortable. This is the surest way to stay in business and give yourself growth options.

A practical method of interpreting cash flow requires you to analyse your bank statement for a certain time period - say six months - to see where your cash is coming from and where it’s going. You need to allocate the transactions into two broad categories, cash in and cash out, and then filter each into as many sub-categories as you need, for example, sales, purchases, salaries, PAYE, marketing, overheads, etc.

Once all your transactions have been allocated and you have opening and closing balances (how much cash you started with and how much you ended with) for the previous six months, you should have a much better understanding of where your businesses cash is coming from, where it is going to, and the net effect i.e., your closing balance at different times in your business cycle. This will be invaluable insight into the content and timing of cash inflows and outflows. You are now in a position to compile a cash flow forecast which you need to monitor on a regular basis.

Sage Intelligence quickly and easily gives you access to the information you need from your accounting system to be able to automate your cash flow report and, once set up, it will be there when you need it literally at the click of a button.

Fig 1: Example of cash flow statement in Sage Intelligence (refer to the how-to video on You Tube for a step-by-step guide to setting up an automated cash flow statement with Sage Intelligence: http://bit.ly/1lJWLGC)

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“Now, at the click of a button, we can provide each site manager with a forecast against which he must order his product and report on variations.” Pieter du Toit Dust-A-Side

Making your budgeting and forecasting work for you Think of your budget and your forecast as the tools that extend your business plan into reality, setting out your financial expectations. Use them to guide your decisions and use of resources, and to project the results you want. For clarity, in this paper we define budgeting as an annual event, forecasting as a more fluid and regular event (usually monthly or quarterly, depending on your business model).

Ideally a small business should run on a three year business plan with a new budget each year that sets out revenues, expenses, interest, net profit and taxation. Accurate budgeting is very important to the success of your business. It clarifies your profit and your profit is what creates your cash flow, which is what drives the survival and growth of your business.

Above all, your budget must make realistic assumptions based on facts and history, not on wishes and dreams. Expenses should be easy to predict and anything more than a 5% variance in your budgeted expenses shows that you’re not being realistic enough in your expense budgeting. Variances in income are not as easy to predict but if you are making profits on conservative sales targets, your business should be in a good financial position.

Accounting packages for small business are often not optimally designed for budgeting and forecasting which is why so many people use Microsoft Excel. This can be a frustrating, time consuming process and prone to finger trouble. By using a quality reporting tool like Sage Intelligence, these problems can be avoided because the financial data in your accounting package is presented in Microsoft Excel in a pre-formatted way, giving you the information you need to make an accurate prediction of the financial future of your business. What business intelligence offers is more control and a much higher degree of flexibility.

At the end of every month you should review your actual results and compare them to your budget and to the same time last year, and then track those figures against your year-to-date. How close are your actual results to your budget? If the discrepancies are too wide, you’d be well advised to re-do your budget – this is essentially your regular forecasting.

These regular assessments give you a keen understanding of what’s working in your business and what isn’t. Monitoring and controlling your budget once it is prepared and captured into your accounting system is essential. Don’t just prepare it and walk away. You need to constantly compare actual vs. budget, month-on-month, year-to-date, etc., and analyse any variances to see if corrective measures are required.

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Tracking your actual performance against budget is made easy with Sage Intelligence. You can choose from a number of preformatted income statements, balance sheets or dashboards, or build your own reports in Microsoft Excel to compare your month-on-month and year-on-year revenues and expenses. Best of all, Sage Intelligence links directly to the data in your accounting package, so you can get your reports with a click of a button. As long as your bookkeeper is up to date, you always have your finger on the pulse of your latest performance against budget and prior year. You are also able to drill down into the numbers to see the transactional details in order to quickly make informed decisions.

Fig 2: Example of a Sage Intelligence Income Statement, showing Current Month and YTD vs. Previous Year Current Month and YTD, as well as the variances

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Understanding your sales trends to drive success If cash flow is the lifeblood of a business, sales must be the heart. Two of the most important questions many successful entrepreneurs ask are:

1. How much have your sales grown or shrunk against the same period last year?

2. Why?

Question 1 is not as important as question 2. If you know why your sales are growing or shrinking, then you understand what is and isn’t working in respect of your businesses growth plans. Tracking monthly and year-to-date sales vs. budgets and forecasts is a key discipline for business success. Unless you’re tracking your sales and measuring them against what you have done or have budgeted to do, you can’t really know if your business is succeeding.

As with all tracking, you need to start with defined sales goals that are in line with your business objectives. This helps you focus, and the more specific and measurable your goals, the greater your focus will be. You shouldn’t only be looking at the bottom line; you should also be taking careful note of how sales results were achieved. For example, do you only sell a certain product successfully below a certain price? This information becomes essential to your pricing strategy, which feeds into successful sales. You also need to look closely at your profit margins – are they realistic for both you and your customers.

Tracking sales against previous years and months enables you to identify trends. This is easy to do with a good reporting tool. Perhaps your sales have grown because you’ve gained a valuable new client or introduced a popular new product line. Whatever the reason, understanding it lets you capitalise on the opportunity it presents. If the new client is in an industry you don’t usually serve, you can now market your offering to other prospects in that industry. If the new product line is that popular, does it make older lines less viable?

On the other hand, your sales might have shrunk because you lost a good salesperson or because you put your prices up. As long as you understand why, you can fix the problem. Do you need to hire a different calibre of salesperson or do you need a better staff retention programme? And what informs your pricing?

“The automated Sales Report saves an enormous amount of time and provides us with meaningful information that is very helpful in making business decisions.” Mike Dayton, Prest-O-Fit

Fig 3: Example of a standard Sage Intelligence Sales Report

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Sage Intelligence can help you track your sales information to drive sales lines and target customers in a more informed way. A simple sales report can give you a snapshot view of your sales broken down by product category or sales rep, while you can quickly see who your top customers are. Because it delivers automated reports in Microsoft Excel and uses those familiar analysis tools, the opportunities to interrogate this information are endless.

Sales trends give you a wealth of valuable information if you can see it and use it to your advantage. All of this information is available from your accounting system and Sage Intelligence enables you to translate your figures into a picture of what’s happening in your sales and why, giving you a strong helping hand towards your progress and success.

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Effectively managing your debtors

You know the jargon – your debtors are the people who owe you money and creditors are the people you owe money to. Getting your money in before you have to pay it out is the key to this discipline and this is why it is essential to monitor your debtor/creditor situation regularly.

Let’s start with managing your debtors, i.e., payments from your customers. When you’re a new, young business, keen to establish a market for your products or services, you might be inclined to take on new customers too keenly, and to extend credit terms that are unrealistic. This is always going to be a balancing act. You should start with a credit policy which guides your decisions on who qualifies for credit, and how much credit they qualify for. You will almost certainly encounter bad debt, and managing your debtors will almost certainly cost you money, even if it is just in terms of time and not in terms of bad debt losses.

The important thing is to invoice accurately, to keep up-to-date and accurate records of who owes you, how much they owe you and the date for settlement of that debt. Act swiftly to collect outstanding debts and consider discounts on cash payments. Think in terms of how you manage your cash and how much better off you are when it moves faster around the cycle. The quicker you collect the money due to your business, the quicker you generate cash.

One of the most important disciplines in effectively managing debtors is to set targets on your debtor ageing. You can also start one step ahead by invoicing on the 20th of the month. If so, does that mean your 30 day clients pay 10 days later or 40 days later? It’s worth taking a closer look at the best time to invoice for the quickest payment.

There are other tactics you can use: incentivize not only your debtors’ clerk but also your salespeople to get accounts paid timeously. It’s all very well one of your salespeople bringing in a great new client but think about when you pay commission on that business. Can you afford to pay it before you’ve received payment from the client? Incentives and sales commissions related to debtor ageing have a magical way of keeping cash flow healthy.

The sales team needs to be as involved in debtor ageing as the finance team is. Depending on your business model and the type of clients you attract, you may need to consider withholding services or goods until debts are up to date or within a manageable target. Harness the enthusiasm of your sales team to help solve these problems.

The hygiene of debtor management is to have a clear policy, set reasonable targets and make provision for bad debts. The trick is to always know your debtor ageing situation and stay on top of it! Sage Intelligence can give you this picture every day at the click of a button.

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“ With Sage 50 Intelligence Reporting I can work with Excel-based template reports, seamlessly pull the data from Sage 50…then I can slice and dice the data to give me exactly the analysis that I need. The icing on the cake: with the built in dashboards I can display these metrics in a visual form that even a non-accountant can understand.”Alan Salmon K2 Enterprises Canada

Tracking the overall health of your business As a small business owner, you will have many conflicting priorities. Understanding your financial data is one of them. That’s why you need a good BI tool to give you the information you need, when you need it, in a format that makes sense for your particular company. You need to be able to keep your finger well and truly on the pulse of your business all the time so that you know when to be conservative and when you are able to run while your competitors are walking.

Sage Intelligence can take everything that we have talked about above and present it in one view, commonly referred to as a dashboard. Just as monitoring your speed and ensuring you have enough fuel whilst driving your car, a dashboard report gives you a snapshot of essential information at a glance, to help you make the right decisions to drive your business forward.

You can customize your dashboard depending on your priorities at any given time. You may want a quick daily overview, drilling down to whatever is appropriate that day. When month-end is looming you may prioritize on debtor ageing and creditor days. After you’ve launched a new product or service you may want to examine uptake on a daily basis, and take a look at its impact on your other lines. You get the idea. You choose your focus... and focus is the gift of BI. It keeps your attention on current business priorities by helping you make sense of all the numbers that go into and come out of your business every day. With Sage Intelligence, you can get a handle on the financial health of your business in just 15 minutes a day. It’s a good way to start every day over your first cup of coffee.

Fig 4: Example of a Management Dashboard, a ready-made report which comes standard with Sage Intelligence

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Conclusion

A lack of fiscal discipline is the surest way to fail in business. It is also the surest preventable reason for failure. The more you review your business in financial terms and the more you correlate the disciplines we’ve discussed in this document, the closer you will come to actively driving revenues ahead of expenses. You should be in a position to make business decisions based on the type of accurate and up-to-date financial information that is delivered by a program like Sage Intelligence. This type of modern reporting tool is designed to give you everything you need to know in the smartest possible way, accurately, in real time and in terms that you understand. Even with everything on your plate, you can have visibility of your key financial indicators to guide informed decisions and give your business every chance of success.

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