The business landscape is changing at an exponential rate. Even before any of us had heard of COVID-19, the fast-changing technological landscape and whims of customer demand has led to business instability. Owners of SMEs need to be proactive and adapt to the needs of their customers and fickleness of the market with speed and alacrity if they want to stay ahead of the competition and remain financially viable.
In challenging times, cash flow may seem impossible to maintain and every day can feel like an uphill battle for survival. As such, businesses need to build measures into their operations that will ensure their long-term financial viability. Don’t worry, you don’t have to reinvent the wheel. Just make sure you make the following a part of the way you do business.
Know how to determine your business’ financial health
When you spend your days steeped in the minutiae of running your business, it can be hard to see the woods for the trees when it comes to your finances. This is why it’s so important to review your business finances regularly, and ensure you know what good financial health looks like.
Here are some useful ratios to help you do this:
Quick Ratio: (Current Assets-Inventories) / Current Liabilities– good for getting a quick overview of your financial health
Debt / Equity Ratio: Total Liabilities / Shareholders Equity – gauges how well your company funds its own growth
Current Ratio: Current Assets / Current Liabilities – helps to identify your readiness to meet your short-term financial obligations
Days Sales Outstanding: (Receivables / Revenue) x 365 – the smaller this figure is, the quicker you’re collecting your accounts receivables
Days Inventory Outstanding: (Inventory / COGS) x 365 – a great ratio for retailers that identifies how long you keep hold of inventory before selling it. It is useful for gauging your performance compared to your competitors
Identify areas of wasteful spending
Running a successful business means investing in yourself. Some capital investments can generate revenue (and profit); conversely, you can reduce some necessary expenses to improve your cash flow without any detriment to your operations, your brand, or the quality that your clientele expects from you.
For instance, how much does your business pay for electricity and/or gas every month? If your tariff has lapsed onto a deemed contract, you’re probably paying far too much for the energy you use. Switching suppliers regularly to better tariffs can save money and improve cash flow without compromising your operations.
It’s also understandable that you may want to keep all of your company’s operations in-house. However, outsourcing services such as IT support, digital marketing and even HR can increase your profitability without compromising your brand’s identity. In other words, you’ve made big improvements to your financial viability.
The one metric that matters
As a business owner, you also have to become something of an amateur statistician. Knowing the right performance metrics and KPIs can help you to get a clearer understanding of your business’ financial health and long-term viability.
But with so much data to keep an eye on, you mustn’t lose sight of the one metric to rule them all – your profit margin.
When your top and bottom lines get too close for comfort, you know that cash flow is going to be a problem. Something will have to give from either end. Your revenue can be a comforting metric to watch. But it can also be misleading, and endanger your financial health. Your profitability should be at the heart of every spending and marketing decision you make to improve the long-term financial viability of your business.
Of course, healthy margins are easier to maintain when you make it quick and easy to get paid – and in that respect...
We can help
If you’re interested in finding out more about creating a direct material purchasing budget, then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.