How good is your early warning system?
Why you absolutely need to know your numbers – and how you can use that essential information to better manage your business and financial risk, and fuel your growth.
2020 created huge uncertainty for us all – across almost every aspect of life. And 2021 looks set to continue that trend. So many business owners have been hit so hard and are really struggling… Even those who have identified new opportunities and are growing as a result are realising the challenges of rapid change.
‘Resiliency’, ‘stamina’ and ‘patience’ have become the key watchwords. But how do you apply those qualities to your business practices and put yourself in the best possible position for whatever comes next?
Business risk is the top challenge for SMEs
Business risk is quite understandably the biggest challenge that SME business owners report they’re are facing at the moment.
Our recent SME survey found that, overall, more than a third (39.3%) of business owners feel that understanding their business risks – including when they are likely to materialise and how they can reduce them – is a key concern.
That number rises significantly in businesses with 11-25 employees. In these SMEs, a full 60.0% of owners told us that how to manage business and financial risk is one of their most significant financial challenges.
So you absolutely need to be on top of your numbers.
In an ideal world, you’d be able to pick up the phone to your accountant, and he or she would be able to talk through your specific business situation and discuss in-depth numbers with you. But, in reality, most High Street accountants are compliance-led, rather than commercially experienced – they’re effectively just running the numbers to make sure you pay the right amount of tax at key points during the year. They simply don’t have the tools or the professional training to be proficient or expert in helping business owners access effective management information and forecasts, and manage commercial challenges or business risk.
So don’t look to your local accountant if you feel you need some support in looking ahead and managing your risks.
Always have core management information to hand
The best way for SME owners to assess and manage their risk is to take a good look at the metrics in their business. To do this, you’ll need to be looking four core types of management information:
- Sales Forecast
- Profit & Loss Report
- Profit & Loss Forecast
- Cash flow Forecast
Having this information to hand throughout each month (not just at the end of your reporting year) enables you to take action when it’s needed, rather than months too late…
Because, to mitigate the risk you’re potentially facing, you have to know how your business is performing right now –and preferably in real time.
These four reports will give you all the information you need to know what’s going on where in your business – and whether it’s good or bad. Without the crucial added depth that this management information gives you, you can’t make any properly informed decisions. And your business risk will increase exponentially as a result.
What key reports will tell you
To optimally manage your business and financial risk, you need to have a very robust way of assessing what your sales orders are going to be over the coming months. Because, at the end of the day, it’s sales that start everything.
So get into the habit of reviewing actual and forecast sales figures every day – or every week, at the very least. You need to know where your sales are at – are they getting better or getting worse? As a business owner, you’ve got to have that sales forecast to hand and to be talking to your sales team all the time, making sure they’re following up every lead and doing everything they can to convert them. That discipline could make or break your business when you’re having a rough time (and maybe even if everything looks fine and rosy).
A profit & loss (P&L) report will tell you how the business is performing financially, month by month – it shows how much money you’re making (or not) each month. You’ll be able to see whether your costs are appropriate and under control.
But you need to be looking ahead, as well as at past performance. So you need some forecasts too.
Your profit & loss forecast should show you what your P&L performance is likely to be for the next 3 months, and it will probably be useful to include projected figures covering up to 6 months. This P&L forecast should be updated continuously, in line with the current situation, so your sales forecast will need to feed into it.
Every week, you should be looking at your P&L forecast to see what, if anything, has changed. Why every week? Because now, everything needs to be available almost in real time. Business owners need to know about any issues quickly – because we all need the agility and the ability to make informed decisions.
Profit forecasts aren’t the same as cash flow forecasts, and we all know cash is king – so make sure your cash flow forecast is also kept up to date every week. Your P&L should feed into your cash flow forecast – your financial controller will make sure that connection is seamless.
Don’t let late payments cause more problems
Another way of managing risk is knowing who owes you money, and being certain when they’re going to pay you (rather than hoping they will pay you on time) – so you absolutely need an updated customer invoices list every week. Importantly, the minute you think (or feel or know) somebody isn’t going to pay you, you have to take action.
It can be a difficult thing to do, but you must do it. If you’re reluctant to ring your customers to chase up a payment, you should read more about why it’s critical to get paid on time and get some simple tips on improving the cash inflow.
It’s definitely not okay to say, “Oh, we’ll wait another week. They usually pay by…” because this is not ‘usually’! The payment protocols you used 18, or even 12, months ago to run your business are probably not fit for purpose now. The pandemic has put paid to that.
Now, we’ve all got to be a lot more agile and disciplined. Management information is the key to your success – that’s what’s going to help you to get through this, or to optimise a particular outcome.
Your toolkit for managing business and financial risk
Business risk can materialise in many different forms. So it’s not actually enough just to know your numbers. You’ve also got to know what they actually mean for your business – how they affect how your different business functions.
Think of the numbers that make up your essential management information as an early warning system. Your key financial reports will certainly flag up any issues or potential problems – and then you can decide to take appropriate corrective action to do something about them.
Here are 8 essential insights that you should consider – to help you manage risk in your business:
- You need to know your actual financial performance every month, so you can make agile decisions around costs and optimise your profit.
- You need profit & loss and cash flow forecasts, so you can see what’s coming and make corrective or opportunity-based decisions earlier.
- You need metrics around every function of the business – it’s your early warning system, like the oil light on your car dashboard.
- When the early warning system is triggered, you need to look at the underlying data and not simply rely on anecdotal evidence (humans are very good at rationalising or explaining issues away – but that superficial approach is often either wrong or, at best, not the whole picture, because it’s not based on actual data analysis).
- You need to manage your money better than ever before – know every margin on every sale, be disciplined at getting paid, don’t spend on things that don’t add value.
- If you work on a project basis, you must have a day-to-day handle on whether projects are running to cost or not – and if not, find out where overspends are and do something about it.
- Use the key metrics in your business to make better informed decisions.
- Take action quickly – whether it’s to resolve a problem or optimise an opportunity.
Explore all the benefits of the affordable, hassle-free way to get the essential financial insights your business really needs.
To find out more about how SME owners feel about the future and what actions you should be taking right now download our latest report – Riding the Rollercoaster: Insights from SMEs.