Traditionally, the start to a new year is a time to make resolutions to change some aspect of one’s life. The same could be said for business resolutions made at the start of the new financial year. As a business owner, now is a good time to take a step back and make some resolutions about the shape of your business. Here are some of our top tips to make your business more financially healthy:
- Your business is your pot of gold
Conceptually, every business is the same. They use capital to produce a profit.
In your “pot” you usually put equity capital (money belonging to the owner and reinvested profits) and debt funding (obtained from the bank, leases, HPs etc). These are the inputs of the business. Out the bottom of the “pot” drops sales, less expenses to leave a profit. These are the outputs of the business.
The secret is to maximise outputs and minimise inputs.
- What is your ROI?
If you were to compare other investment opportunities such as risk-free government bonds and publicly traded blue chip stocks, you could expect to receive a return of 4% and 12% respectively. Therefore, you should expect to receive a higher rate of return for your business, which is not publicity traded (i.e. easily sold) and usually in one industry, with a higher risk.
- What financially drives your business?
Do you know what factors drive your business? Ask yourself whether your business is volume or sales driven? Is it margin driven? Is working capital a key driver or are you in a capital intensive industry with large investment in plant and equipment?
Once you know and understand these factors, you’ll be able to assess that it’s no use selling more if it is at the expense of margin and you end up making less profit. Either way, you need to know in what area changes will give you more “bang for your buck”.
- Small changes can make a big impact
Some business owners think that the only answer to their business woes is to simply increase prices or increase sales.
Making small changes are usually overlooked, but they can be so beneficial to your business health. Making small, achievable changes in a handful of areas can have a multiplier effect on return on capital employed (ROCE). Focus on the key driver/s of your business (as per tip #3) but also look at other areas including working capital management, under-utilised assets and margin.
- Plan and work towards achieving a certain ROCE
Once you’ve decided on the minimum rate of return from your business (as per tip #2) do the necessary financial modelling so that you know what needs to change (see tips #3 & #4) in order for you to achieve your desired return.
- Assess your free cash flow (FCF)
It is actually possible for your business to make a profit but be left with no (or negative) cash flow. This is because business management decisions and accounting policies have an impact on how profit is reported.
Furthermore, as businesses grow, more and more cash is utilised in more and more stock, debtors and plant. Many fast-growing businesses have gone broke through lack of cash flow.
At Lockwood & Ward we specialise in helping businesses achieve their financial health goals. For more information on how we can help grow your business, email us at email@example.com or speak to one of our exceptional advisers on 02 9299 7044.