At the end of the financial year (EOFY), it’s time for businesses to take stock.
With the end of the financial year (EOFY) just around the corner, it’s time for businesses to take stock, both to ensure that they are operating tax effectively and to put their finances in order for the coming year.
Do a financial health check
EOFY is a good time to give your business a financial health check. Reviewing your financial statements will help you identify key areas of weakness or potential threats to your business.
Using financial ratios such as liquidity ratios, solvency ratios, profitability ratios and return on investment ratios, and comparing these ratios and indicators with prior year figures and similar businesses in your industry, will ensure that you start the new year with complete transparency over all key issues within the business.
Revisit or draw up a strategic plan
After doing a financial health check, you can use the end of the financial year as a time to reconsider its strategic direction.
This should involve an analysis of your market and predictions on future developments in it.
It is important that your strategic plan reflect the business owners’ objectives for the business and those areas that need focus following the financial health check.
To bring the strategic plan to life, it should include a work plan, responsibilities and due dates, all of which should be monitored throughout the coming year.
Draw up a budget
You will need to allocate resources to achieve your strategic plan and a budget will therefore need to align with it.
If the budget shows that a particular objective in the strategic plan is not affordable, you may either need to seek more resources for that objective or modify your strategic plan.
In setting your budget, you should list your assumptions. To stress test your business, you can amend those assumptions to see what it does to your financial position. An example could include a 10 to 20 per cent reduction in sales or a 20 per cent increase in fuel costs.
One of the most important aspects to a budget is regular monitoring against actual results and it is wise to allocate time to review both actual and budget figures to ensure that your strategic objectives set for the financial year will be met.
Prepare a cash flow forecast
One of the most significant problems faced by a business is poor cash flow. A cash flow forecast is a fundamental part of good business practice.
Your cash flow forecast should align with your budget and be monitored regularly.
Issues impacting the profitability of the business may have come to light in your health check, strategic plan review or in drafting the budget.
Other issues impacting profitability may also be found by reviewing:
- staff productivity (including staff rostering)
- the production process
- supply chain
- how business assets are used
- the focus of your promotional activity
You should also review, among others:
- any discounts that are offered
- ways to increase sales of the most profitable products or services
- reducing input costs
- seeking advice on tax-effective expenditures.
Ensure you have finance options
All businesses need finance to grow. Finance can be provided from debt, equity and internally generated cash flow.
What you may need the finance for – for example, asset purchase versus stock purchases – will determine the type of finance you should access. It is most favourable to have surplus finance available to cover business contingencies and possibly take advantage of new opportunities should they arise during the year.
Where you are seeking finance from a lending institution you should maintain a good ongoing relationship and year end is the perfect time to meet and discuss the business plans for the coming year. You may find that they will offer further assistance with your future plans.
Revisit your marketing plan
While it may seem obvious, it is important that your marketing plan be focused on achieving key objectives, particularly improving your cash position.
Ideas for better aligning your marketing plain wth your business needs include:
- focusing on sales that have a high margin and bring in cash quickly. Well-placed visual displays such as in-store signs and posters can be a great tool to highlight a special or high margin product.
rewarding staff for sales of products with a higher margin
only paying staff commission when payment is received
measuring the success of each promotional activity or campaign so as to gauge its efficiency
focusing on encouraging customers to pay at the point of purchase or to pay as early as possible.
Review your risk management strategies
Whether your business is facing good times or bad, it is important to always have appropriate risk management strategies in place. Important risks to be aware of and to seek to manage include:
relying too heavily on a small number of major customers. This can in part be managed through increasing the number of your customers and helping smaller customers to grow.
- relying too heavily on one supplier. This can in part be managed through identifying potential alternative suppliers.
selling on credit. This can in part be managed by subjecting potential customers to credit checks, limiting the amount of credit that a customer can have, following up on payment before the due date and stop supplying customers if they are late payers.
fraud. This can be managed in part through having in place internal controls in high risk areas such as cash handling, making sure those internal controls are enforced and breaches are acted upon promptly.
Take advantage of opportunities
Don’t turn a blind eye to new opportunities that are consistent with your strategic direction and can be properly funded.
Businesses that are well run use these ideas during both the good times and bad in order to maximise their profits, grow and minimise risk. Using them now can help your business to emerge in a much improved condition, which will likely lead to long-term growth.
This article originally appeared at Officeworks.