what clients need to know.
by ed mendlowitz
77 ways to wow!
if you want your business to grow, don’t focus on only the easy financial controls where you can see quick results – such as holding down petty cash expenditures or checking expense accounts for accuracy.
more: rule #1: start with cash | organization minutes too often overlooked | the seven-minute financial statement | the kpi an absentee manager needs
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instead, go for the tough steps that affect long-term profits and facilitate growth.
10 financial controls for business
- watch the cash outflow. try not to pay bills faster than necessary, but don’t make late payments. it is okay to pay some suppliers quickly to obtain an advantage with them, but you cannot do this with all your vendors.
- speed up deliveries. the faster customers receive their goods or your services, the more quickly they’re likely to pay for them. also, faster shipments increase the likelihood of quicker reorders.
- consider financing. many businesses make the mistake of paying cash for their capital equipment, often because of the owner’s ego or an aversion to interest payments. use longer term loans to finance equipment with a deferred payback period.
- reduce inventory. fast-moving items and those that compose the bulk of sales are usually a relatively small portion of total inventory. slow-moving products, on the other hand, often build up into a large share of items on hand. identify slow-moving items and sell them off to convert them to cash. not only does selling excess inventory produce immediate cash, but it also cuts future costs by reducing the amount of inventory that needs to be managed and possibly financed. for service businesses, delaying getting work done is the same as inventory – get it done, out and billed.
- reduce work in progress. run efficiently by avoiding bottlenecks and backups on the production line. look for areas where the production process slows. these bottlenecks point to activities that need to be improved. look for antiquated equipment, untrained workers or an insufficient number of machines or workers.
- watch customer credit. preventing customers from extending payments beyond the due date might seem obvious, but few businesses actually adhere to it. that’s usually because it takes time to monitor receivables and even more time to telephone late-payers. have a report prepared that flags past-due accounts. read these reports regularly, and have the customer called immediately when you spot a delinquent bill.
- target big debtors. despite their best intentions, businesses often let customer credit get out of hand. in extreme cases, companies wind up financing a customer’s business, usually without realizing it. by that time, a customer might owe more money than the net worth of the business. when it comes to large delinquent customers, it should be your goal to be assured of getting paid while retaining the customer. consider asking for a personal guarantee from the owner, receiving an interest-bearing note and lien on customer’s assets, life insurance on the owner, and agreeing to continue supplying the customer, but only if they pay cash for new orders plus an additional percentage – say, 10 percent – to pay down the outstanding debt.
- watch the margins. after companies have been in business a few years, many fail to keep tabs on how much profit they make from each product or service line. too often, they waste company resources holding on to unprofitable items. look for higher margin product lines that develop and then start promoting them more aggressively.
- monitor personnel. in mature businesses, personnel and related costs creep up over time and aren’t watched because of a comfort zone that emerged. justify the role of each person who works for you. if you have salespeople with draws and commission overrides, calculate the actual costs for the sales they generate.
- profits are essential. pay attention to the bottom line. profits are necessary for growth, your personal financial security and asset value creation. know your break-even point and set targets to exceed it.
businesses are dynamic and constantly changing and need active and deliberate management and leadership. establishing financial controls is a major part of that management. get the right reports delivered daily that you can easily monitor, review and use to get a handle on key aspects of your business.