Just because a business is small doesn’t mean financial management should be second class.
Clever financial management is key to a business's long-term survival and, importantly, its future growth prospects as well, say industry experts.
Bank and benchmark
One way to really understand where your business stands in the scheme of things is to tap the knowledge of your bank.
"There are a lot of good reports available from the banks' systems that can tell you when people are buying things and when your peak demand is, and this doesn't cost you anything – it's just available as part of your normal transactional banking,” says Simon Trivett, Partner and National Head of Retail at Grant Thornton Australia.
Trivett says all the major banks are rather competitive in this regard, but some do it better than others so ask your bank to make sure you're getting all the intelligence you can.
For retailers with more than one store, Trivett says gathering in-house intelligence to benchmark store performance is very valuable. He says benchmarking is something an accountant familiar with the retail sector can help you with.
"Get all your stores to report the key data regularly. The good businesses are certainly doing it on a weekly basis," he says.
"Track financial stuff as well as non-financial stuff, such as customer feedback. It might identify really simple [things], like the opening hours aren't right."
Benchmarking, according to Trivett, will help you identify the factors that drive growth and allow you to replicate it across the board.
Put simply, the more you know about every aspect of your business, the greater your ability to take control of its financial future.
Hedge your bets
Communication technologies have opened the doors wide for small businesses to play a more direct role in importing and exporting, says Trivett.
This also means that small businesses are exposed to foreign exchange risk.
One important risk that retailers can minimise or eliminate when it comes to forecasting is foreign exchange fluctuations. The Australian dollar has been high over the past 12 months, closing the week ended August 22 at about 93 US cents.
But, provided no global shocks emerge, many economists expect the Aussie to ease back toward a more normalised rate in the range of the early to mid-80 US cents.
"As that happens, the majority of retail businesses in Australia will face an increase in the cost of goods sold," Trivett says.
"Let's face it, most of our goods are imported these days, so as purchasing power declines, margins are going to be squeezed."
Passing cost increases on to customers can be tricky, but taking a hit on your profit margin can be detrimental to your business.
Trivett says the way to mitigate currency fluctuations is to lock in your exchange rate by purchasing foreign exchange contracts. This way you will always know what your margin is.
"Think: What's your core business? Is it sourcing stuff intelligently and selling it in an innovative and exciting way? Or are you a foreign exchange trader?
“If you decide you're the first type of business, then you'll hedge and lock in and control on the things that you can," Trivett says.
He says some businesses prefer to hedge 100 per cent of their costs affected by exchange rates, while others like to only cover a percentage, leaving some free to move up and down with the market.
The degree to which you hedge comes down to how much risk your business can handle, and that knowledge is gained through in-depth analysis of your balance sheet and operations.
David and Goliath
Whether you're BHP or the local newsagent, when it comes to managing finances the rules are the same, says Peter Phillips FCPA at PP Cost Management.
Despite this, the way small and large businesses manage their affairs is often oceans apart. Phillips says this gap generally comes down to control – something large businesses tend to be much better at.
"The reason for that is when a business starts, the owner tends to know everything. As it grows, the owner starts losing control a bit, so it's important to define their controls and write them out.”
Controls are important for all aspects of the business, whether it's on the sales floor, managing stock inventory, or even employee benefit schemes.
All these various business activities impact the balance sheet and when analysed, can highlight which areas of a business are performing and which are underperforming.
In short, true control of your business's finances allows you to better navigate the market.
Phillips says businesses need to identify all the things that contribute to their operational costs and manage these effectively. Are there activities that are costing you more than they're worth? Creating policies, documentation and staff training on how such costs should be managed will improve efficiency.
"If businesses are empowering their people with knowledge about the costs of an operation, then their people can help them avoid the costs upfront," he says.
Further, business owners need a thorough understanding of all their fixed costs and overheads. An accountant can help set up a suitable accounting system to monitor cash flow.
It's an area where small businesses often drop the ball, particularly when it comes to factoring in costs that will be incurred down the track, such as the need to replace ageing assets.
"Unless you're actually making money that allows you to replace your assets, then you're going to be challenged," says Phillips.
Lastly, Phillips says you need to understand all the potential risks to your operation and operate within a means that will allow you to combat them should they materialise.
"Businesses need to be able to forecast where they're going to be," he says.
"Forecasting is important for any business, making sure that when they forecast, they forecast all of the costs that they are going to have."
Manage your business like a finance pro
- Tap into your bank’s business know-how
- Lock in exchange rates to mitigate currency fluctuations
- Benchmark: Gather in-house intelligence to benchmark a store’s performance. Include non-financial information, such as customer feedback.
- Identify what contributes to operational costs
- Thoroughly understand the business’s fixed costs and overhead
- Assess the potential risks.
Alia Parker is a finance journalist with more than a decade of experience spanning newspapers, radio and the wires on an international scale. When she's not writing about finance, she heads up The Australian Bicycle Route Project.