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Here Bernadette McGrory Farrell of W.O. McGrory & Company continues her look at key business management issues for achieving success in today’s uncertain business climate.
Over the almost 40 year life of our 2nd generation Accountancy Practice we have identified these ten pitfalls as common to almost every small business.
1. Cash Flow Problems 6. Overtrading
2. Lack of Capital 7. Costing and Pricing Issues
3. Annual Accounts 8. An Inability to Generate Sales
4. ‘The Big Contract’ 9. Practical Planning for Growth
5. Small Customer Base 10. Excessive Personal Drawings
In last month’s article I looked at the importance of recognising what stage in its life-cycle your business is at and what its key requirements are, and how you can use your accountant to help provide you with the management information you need. Here I am going to look at Pitfall 1.
Pitfall 1 Cashflow Problems
First this month, I want to explode a popular myth. The myth is that a profitable business will always survive. Not so. Cash is king. Profit is no good if it is tied up in stocks, debtors, work-in-progress or equipment. Managing your cash flow is the single most important factor in surviving in business. This means having tight control over your debtors, over your stock, over your expenditure, and over your bank balance.
If making or providing your product or service is the engine of your business, then managing your working capital is making sure the engine of your business has oil in it. Firstly let’s get rid of the jargon. Working capital simply means the amount of money that is invested in your stock, your debtors (money owed to you for sales), your creditors (money you owe for raw materials/consumables/taxation), and your bank balance. This is a circular relationship. If you are holding too much stock for too long, not collecting in the money owed to you fast enough, then the profit you think you are making in your business is no good to you.The other half of the working capital circle is paying your creditors and getting money into the bank. If this is not happening you could be profitable and still find your business in serious trouble.
The key tool for managing this is drawing up a Cash Flow. Your accountant will help you with this. Keep your cash flow document up to date and keep it live. This document ’does what it says on the tin’, it is the best way of ensuring that cash flows through your business and doesn’t get stuck in stocks or debtors. It forces you to plan and forsee how expenditure will occur and to recognise the difference between the cash that belongs to the business and the cash that is yours.
Use the resource that is your accountant to help you with this area. Your accountant will only be too happy to work with you to ensure you have the best information so you can keep your business on a straight path in these uncertain times.
Go to www.mcgrory.ie for more information.