How managers can improve their small business's financial health
Small businesses make up a huge proportion of all private sector businesses in the UK - a whopping 99.3% at the start of 2018. However, an estimated 20% of small businesses fail within a year, while 30% fail within two years. Why? Both lack of cash and failure to collect and analyse performance data are cited among the reasons for small business woes. In order to survive—and succeed—it’s crucial then to routinely monitor and improve the financial health of your small business.
Read on to find out how to put financial health at the heart of your business operations.
Step One: Assess the current state of your financial health
The first step in improving your small business’s financial health is to assess as accurately as possible where your business stands at present.
Go back to basics
Make sure the business records you keep are comprehensive, accurate, and up to date. If your current record keeping system is lacking in any way, look into alternatives, such as using accounting software. When you have access to up-to-date financial data throughout the fiscal year, you’ll be able to spot problems as well as opportunities sooner and can take appropriate action faster.
Work out your business ratios
One of the most useful things you can do with your key figures is to work out business ratios. This allows you to put your basic numbers into context and benchmark how well you’re doing compared to other similar businesses. Business ratios also aid you in budgeting, decision making, and goal setting. Commonly used business ratios include liquidity, solvency, and inventory-to-sales ratios.
Ensure timely invoicing
Receive payments faster by always invoicing promptly. Set aside a specific time each week for the task, or alternatively, adopt an automated invoicing system to speed up the process. Make sure that all outgoing invoices state payment terms and conditions, and chase any overdue ones without delay.
Maintain a positive credit score
Building up a business’s credit rating matters; a positive score improves your business’s chances of receiving loans and making profitable deals with other companies. A number of agencies can help you access your business credit reports and scores. To improve your rating, prioritise meeting financial obligations, such as making payments to creditors on time and paying off the business credit card each month.
Take a closer look at your inventory
Having a large inventory is not necessarily good for cash flow and financial health. Use ratios such as the inventory-to-sales ratio (which contrasts investment in inventory with monthly sales) to work out the sweet spot for your business—and make any necessary adjustments.
Consider selling and/or leasing assets
Does your business have any unneeded assets? Selling them on could generate cash as well as reduce storage costs. When acquiring new assets, consider leasing as an option; it can work out cheaper than buying and helps you spread the cost too.
Reduce the costs of running a business
Managing expenses carefully is as important as increasing income when it comes to financial health. Reviewing your biggest outgoings and regularly research alternative service providers that could be cheaper (and possibly also better suited to your needs) is something you may put off because it seems time-consuming, but not doing this could cost your busy more in money and time in the long run. If you need to set up reminders to evaluate your service contracts on a regular basis to sort out which add value and which ones you can easily do without or replace with something more cost effective.
Stay on top of bills
Avoid late fees and interest by scheduling bill payments, or set up an automated bill payment plan to ensure everything is settled on time. Remember that late payments also affect your business’s credit rating. Set up reminders to evaluate software solutions and other service contracts on a regular basis to sort out which subscriptions add value and which ones you can easily do without or replace with a basic free tool.
Look for better deals
Switching suppliers, be it for new stock or energy, can offer significant savings, so look for cheaper alternatives from time to time. When it comes to managing debts, work out if taking a new financial product to combine existing debts could reduce interest payments and overall cost.
Explore new marketing strategies
Marketing campaigns don’t need to be expensive. Brainstorm new approaches to marketing – social media in particular offers various ways to advertise goods and services at a low cost or even for free.
Optimise your workforce
Your workforce is your business’s lifeblood. Feeling engaged keeps your employees productive, and keeping staff happy helps you avoid unnecessary recruitment expenses too. Check in with staff frequently and show them that they’re valued. To further ensure that you get the best out of your staff and aren’t paying for any ‘missing hours’, have a clear attendance policy in place and invest in an effective timekeeping system—Findmyshift’s simple rota software helps you stay on top of your employees’ shifts!
We hope these strategies are effective for you in improving the financial health of your small business.