For many SMEs, the day-to-day reality of running a business will mean that the first time they sit down to undertake a thorough analysis of their financial status is when they are planning to hit up their lender for more capital. In order to obtain a clearer picture of the financial health of their business and to have the best chance of obtaining the funds they need to expand, SMEs need to consider a number of budget components relevant to their business.
But even for SMEs not in the market for more money, a regular, in-depth assessment of the financial status of their business is a very smart move, particularly for those business owners looking for a future exit strategy. Here are some of the key things to consider in your analysis.
Who are my top 10 customers and suppliers?
Determine your top 10 customers and the percentage they contribute to your overall profit. At the same time, identify your top 10 suppliers and determine what percentage they contribute to your overall supplier costs.
This will help identify how important each customer and supplier is to your business. Consider what effect losing each of these customers or suppliers would have on your business. Is there a customer or supplier that your business relies on heavily? If so, you need to develop strategies to mitigate the risk involved if they walk.
Another reason to analyse your suppliers is to determine whether your buying power with a particular supplier is such that you could negotiate a better deal with them.
Analyse the seasonality of your business
It’s critical to determine how your business has performed each month across a number of years. Depending on the nature of your business, you may have some very high and some very low months. For example, if you’re supplying products that are popular with customers during the summer months, you will have a marked variance in profits during summer and winter.
While you may have already factored this in to your financial planning, you also need to consider the effect an unforeseen change could have during the leaner months. Your budget needs to be live and dynamic so you can see the effect a change would have on your profits in any given month.
Forecasting for success
Many SMEs now import a substantial amount of the products they on-sell or use in the manufacturing process, which means they have long lead times (up to five months) between placing and paying for their orders and receiving them. This is where forecasting is crucial to ensure they have sufficient cash to pay for the goods when they place an order and then enough funds coming in during the interim to keep their business running smoothly.
Plan for your growth
Your lender will want to see a three-way forecast, which will include a profit and loss statement, a balance sheet and a cash flow forecast. You will need to demonstrate a clear understanding of how your business will operate during the expansion phase and beyond.
This will involve mapping your next five years in business. For example, while the first year of expansion may involve a large cash outlay to pay for bigger premises or new equipment, by year two your expenses will be out of the way and you will start to show a profit. Ultimately, you want your lender to think you know what you’re doing and that your business is worth backing.
A regular, thorough analysis of your budget can help take your business to the next level. Unfortunately, many SMEs don’t look further than 12 months ahead and this may mean that they will miss out on opportunities in the future.
It’s important to look 5-10 years ahead and think about how much your business will be worth at that time. By keeping your budget dynamic and having a roadmap for growth, you will be able to see where you should go next and how much your business will be worth if and when it comes time to sell.
About the author: Milton Young is a former business banker and the owner of a First Class Accounts bookkeeping franchise, based in Melbourne.