HIGHLY EFFECTIVE FINANCIAL CONTROLS

HIGHLY EFFECTIVE FINANCIAL CONTROLS

Establish some healthy habits in areas that are crucial to your success… 

There are a number of tips that can help guide you through tough times. You should adopt these habits on a permanent basis – whether times are good or bad.

FINANCE

  • If you lose control of your finances; you lose control of your business. And cash flow governs what is happening right now in the business. Your books, whilst also very important, represent the past and what has already occurred.

    It doesn’t matter how many people owe you money, it is what is actually in your bank account – less what needs to be paid out – that counts. So it stands to reason that cash flow needs to be properly managed and should be discussed at all management meetings. If, like me, you are a solo-preneur, make time (weekly) to check what is going on.

    Monitor your Management Accounts on a regular basis and check key ratios consistently. This will help you to identify problem areas early. Updating your cash flow forecasts on a regular basis will also keep you ahead of the game. Issues like a change in the exchange rate or a price hike in fuel could have a huge effect on your margins.

  • MARGINS

    A margin is the difference between what everything costs (not only materials, but also time and expenses) and what you charge. If your margins are too low, you will never make a profit. But if they are too high, you run the risk of never making a sale – it’s a delicate balance.

    There are two ways to increase your margins: cut costs or raise prices. To work out which is right for your business, you need to keep a constant eye on your margins as well as current economic trends. It is not always a good idea to raise prices. Cutting costs, however, is always a good idea as long as this does not impact the quality of your service or product.

    Increasing the price of your services and/or your product is a powerful statement – it says “I’m worth it” or “my product is worth it.” When I started out, I used my corporate salary as a gauge to set my hourly rates – a big mistake. I priced my services far too low and as a result attracted lots of clients who desperately needed my expertise, but could not afford it. Within two years I had doubled my hourly rate and was attracting clients who needed me, and who could afford me.

    Raising my fees had an incredibly powerful effect and made me realise what I was worth. I had been chasing business by offering discounts in the hope of retaining clients that could not afford my services in the first place. This was a costly mistake, and I had to write off a lot of bad debt as a result. When I give discounts today, it is because there is a huge value to me and my decision is based on a set of criteria, including early or timeous payment, bulk orders etc.

    Cutting costs is definitely the best way to increase your margins and thereby increase you profits. But in tough times this can be hard to do, particularly if staff and salaries come into the equation. But you have to divorce yourself from the emotion and look at the cold hard facts. If you have two people doing work that can be done by one person, then it stands to reason that you only need to employ one person – don’t get sucked into the emotional side of things. It’s all about what’s good for the company.

    Keeping costs to a minimum and paying clients to a maximum, is the best way to ensure that your margins remain on tracks, and is also the best way to meet and even surpass your budget requirements.

  • CLIENTS

    Retaining clients is a huge challenge for SMEs; even though it is generally considered easier to sell to existing clients than to procure new ones. So what’s the deal? Perhaps it is because they don’t really know who and what a customer is.

    org says: “a customer (also known as a client, buyer or purchaser) is usually used to refer to a current or potential buyer of the products of an individual or organisation, called the supplier, seller or vendor. This is typically through purchasing or renting goods or services.”

    So how do you retain customers? How do you ensure that you not only find new customers, but that you continue to sell your services and products to current customers or even customers who you have not sold anything to in years?

    Here are some tips:

    The personal touch. I’ve been a client for a specific bank in my personal capacity for more than 25 years, and in my business capacity for almost eight years. I bank with them because the perceived hassle of changing banks is huge, not because of the service offered. I have no idea who my personal banker is, or if indeed I have one. I have been dealing with the same branch for 20 years and sadly the only person who knows my name is the security guard. In my opinion, the security guard should be doing their PR; he greets most people by name with a smile. The good that he does is then smashed to pieces by the ineffectual service offered by the branch staff. So make sure that you give your clients your absolute attention, and use your personal touch as part of your branding and marketing effort.

    Assumption. Perception and assumption are, in my view, two of the most dangerous words out there. Just because your customers aren’t complaining, don’t assume that everything is peachy. Most people don’t complain, they just vote with their feet or their wallets. Ask your customers if they are happy, and if they aren’t, do something about it.

    Expectations. Your customers expect to receive good service – and this is a reasonable expectation. Meeting and exceeding this expectation, will go a long way to ensuring that they become loyal customers. Remember though, do it once and the customer will expect even more the next time around, so don’t stop trying.

    Customisation. One man’s food is another man’s poison. Just because one client is crazy about your product or service, doesn’t mean that everyone will be. Be prepared to customise your product and/or service to meet the requirements of other clients. In fact, make sure that what you are selling (service or product) is what the client wants, rather than what you think the client needs.

  • WORKING CAPITAL MANAGEMENT

    Managing your working capital correctly will have quite an impact on your cash flow. For instance, your clients pay you on 30 days, but your suppliers want payment upfront. By negotiating better terms with your suppliers and/or your clients, you will decrease your risk, improve your cash flow and allow stronger working capital, which could go towards growth and/or expansion.

    Another critical area to look at is your debtors’ list. Make sure that you follow up on outstanding or overdue accounts on a regular basis, and don’t be scared to put errant clients on hold or to fire them in extreme cases. Remember it’s your business, and you make the rules.

    Stock levels must also be managed effectively and efficiently. This is one of the first areas in which you will experience losses if there is a downturn in the economy. In fact this is true even if there isn’t a downturn. Stock needs to be properly controlled to ensure that shrinkage is kept to a minimum and stock levels are acceptable. There will be consequences if you have either too much or too little stock on hand. Don’t forget to make sure that your stock is properly insured and that the FIFO (first in first out) method is used – particularly with perishables.

    One of the first things that seems to go for a ball of chalk when times are tough is advertising. But taking your marketing out of the equation means that fewer potential customers are going to hear about you, and fewer customers are, therefore, going to buy from you. To increase your sales, you should increase your marketing and advertising.

    By all means, modifying the way that you market your product. Opt for a smaller PR agency or try handling your PR yourself. Launch and email campaign or use social networking sites and Twitter to drive people to your website. Start a newsletter and fill it with useful information for your clients. Make sure they don’t forget you and go to your competitors as a result.

    Change the way that you’re marketing yourself if you must, but increase your marketing rather than decrease it.

  • INCENTIVES

    You need to keep your staff motived if you want to get the business in and orders processed. Rather get rid of any poor performers and reward those who have invested themselves in your company and who work effectively and efficiently. Poor performers take up a huge amount of management time and ultimately increase costs.

    Here’s the thing, if you have tightened your belt as far as it can be tightened, then most of your staff have probably take on extra duties. And you need to reward them for this effort. You may have to get creative, if you can’t reward them financially. Perks don’t have to cost a lot. Flexi-time, for instance, or even allowing employees to work from home are great incentives.

  • OPERATIONAL COSTS

    One of the quickest ways to decrease costs and increase productivity is to keep operational expenses to a minimum. Machinery should be well maintained to optimise efficient use, and processes should be implemented to ensure quantity and quality of output. This output should also be measured to make sure that it is of the highest standard. By regularly reviewing processes and procedures, workflow output will be optimised and constant.

  • COMPETITION

    A final piece of advice; keep your enemies close. Make sure that you know what your competition is doing so that you can do things better. Offer value for money and operate from a place of integrity and honesty with your clients, your suppliers and your staff. In your business, honesty really is the best policy. 

Reference: 

Nikki Viljoen – Internal Auditor and Business Administrator (Your Business)