To say 2022 has been a ‘turbulent’ year would be an understatement.
For most businesses worldwide it has been one of the most challenging in living memory!
The end of the year is a good time to pause and reflect on what happened, what went well, what went wrong and how you plan to proceed in 2023.
A place to start business planning is to sit down and review your Year to Date financial reports to December. Compare actuals to budget (if you have one). Where were targets missed? It’s handy to measure changes by percentage as well as dollars, as percentages highlight more clearly the level of change. If you don’t have a budget… It’s never too late to start!
Are you splitting your revenue e.g. by product/service categories, divisions, branches/locations, customers, salespeople etc.? If you are, you will be able to see more clearly where action is needed. If you just lump all revenue into one account in your accounting system, it makes it very difficult to see exactly where the issues are.
The new year is a good time to consider a price increase if you haven’t done one recently. Everyone’s costs are going up and it’s not reasonable to absorb them all yourself. Sure be a bit less greedy when it comes to profit but don’t be a charity. If you really can’t achieve a price increase, can you seek alternative supplies or get better prices from current suppliers? Remember every dollar in reduced costs goes straight to your bottom line.
Have a close look at your overheads and how they contribute to business operations. Are they getting out of hand? Can some of them be shaved without too much detrimental effect on the business (especially customers). Remember every dollar in reduced overheads goes straight to your bottom line.
How happy are you with the Net Profit? Is it good enough for all your effort? How does it stack up against your budget?
How is your bank balance looking? Cash is usually the ‘canary in the coalmine’ when it comes to business financial health. If cash is tight, a great tool to help is a Cashflow Forecast. You plot out money coming in and going out for the future and it shows pretty quickly where the problems will be. It enables you to work on them before they become a real issue. A Cashflow Forecast helps business owners to see much more clearly the situation ahead and feel less stressed by it.
If you have business borrowings, are they the right type? Should you investigate other options? How are lenders viewing your business? Are they nervous about the indicators? What can you do to improve them?
Are your customers treating you as a bank? Slow paying customers are ruinous to cash flow. You need a system that gives them as little room as possible to pay slowly. Put someone in charge of it and give them targets to meet.
Are you taking advantage of all the terms from suppliers they offer? Paying suppliers too quickly is also ruinous to cash flow. Spend a little time reviewing the business you’ve done with them and use it as ammunition to seek better terms or investigate other suppliers. Ensure your bookkeeper or whoever pays suppliers doesn’t pay early unless a discount is offered.
How’s your inventory tracking? Have you got too much cash tied up in slow moving stock? Do you manage it closely for optimum levels? Think of stock as dollars piled up on the stockroom floor.
How is your Work in Progress (WIP) tracking? This is another place where cash gets tied up in labour and materials used on jobs that haven’t been invoiced yet. Think of WIP as dollars piled up on the workroom floor.
Have you got too much tied up in assets? Are you able to free up some cash here and lease or hire instead of paying cash for things.
I know these all sound like boringly obvious things but if you take a little time to sit down quietly and review them and set out a plan to implement changes to each early in the new year, you will definitely reap great rewards in terms of profit and cash flow… Not to mention business owner sanity!
The end of year is a great time for reflection on what you want to achieve in the new year and how you plan to get there. Remember the old saying “If you aim at nothing you will reach the target with amazing accuracy”
Once you’ve put your targets in place, set aside a little time each month to review the results with someone who understands financial management. They can repay many times their cost in better results and clarity you get over the situation.
