Starting the New Year with vows of getting into shape physically is the hallmark of many resolutions. Spring and summer months soon reveal just how successful some people were at honoring those personal commitments. Just has individuals vow to become healthier, you can make a similar commitment for your business. With the right goals and plans, your business can become – and remain – fiscally fit for many years to come.
According to the Small Business Administration, approximately 600,000 new businesses are opened every year. While this sounds like a lot, within four years only close to 44 percent of those businesses are still open. What is the difference between the ones that shutter their doors and the remaining 56 percent? How do some businesses manage to remain fiscally fit while others seem to flounder operationally and financially?
The short answer to these questions depends on one main ingredient: a laser sharp focus. In general, you want to put plans and processes in place that helps you achieve business goals. There are many approaches to making sure your business is fiscally fit now and in the future. The path you take will largely depend on your business industry and the level of success you want to achieve. The following information offers some guidance on getting started towards a fiscally sound business.
The quickest way to a fiscal dead-end is not setting strategic, measurable goals. The second quickest way is setting goals that will not lead to business success. Goals for your business should follow the standard SMART principle for making sure you have a laser focus on what works best for your business.
Real goals are measurable; resolving to lose weight is not the same as cutting back calories and resolving to run a mile under six minutes by September. You must outline steps required to achieve that time, which might include hiring a personal trainer.
Any business goal you want to achieve must also be realistic. Continuing with the physical fitness example, perhaps running a mile within six minutes is too difficult to do this year. If so, set a goal to comfortably fit into a favorite outfit.
The same applies to business goals and quantifying goals helps to put them in focus. Hiring new employees might not be a valuable decision for your business this year. However, you may want to increase profit margins by 25 percent. Think through the steps needed to accomplish that goal.
Another helpful approach is to divide big goals into manageable tasks. To illustrate with the running example, a person would need to run four laps around a standard track to complete a mile in less than six minutes. Each lap would need to be one minute 29 seconds or less. It is easier to achieve the bigger goal by concentrating on reaching each single lap time.
Ambitious goals for your business are good; breaking them into manageable pieces is better and can be the difference between achieving the goal and giving up.
Gross profit and gross margin are important for every business, regardless of the industry. However, each business also has a particular set of metrics that can underscore problems or a healthy operation. Identify which metrics apply to your business and watch each one carefully. If you provide maintenance service, watch how much revenue you earn per service technician. A business with a sales force should watch revenue per employee.
By monitoring important metrics, you can know if activities are on pace to reach business goals. Additionally, you can identify how much cushion exists during slower periods.
Paying attention to end-of-season inventory levels applies to any business that sells seasonal products. There are times when you might sell end-of-season products through a sales campaign. Other times, leftover inventory decreases in real value if you are unable to sell everything. While real value decreases, you are accumulating carrying costs. Instead of having a decrease n cost of goods sold, your business is actually suffering a cash flow problem.
Monitoring inventory starts at the beginning of the season by understanding customer buying habits. Have a plan for handling the unexpected excess of inventory before it depletes your cash flow.
There are some operating expenses that businesses deem unmanageable. This gray area might include fixed expenses such as fuel costs, lease payments, bank fees, utilities and taxes. However, this assumption overlooks the fact that there are many variable operating expenses that are usually classified as fixed.
For instance, utilities and fuel consumption might go up when revenues increase, but at the same time will go down when revenues decrease. Other examples of variable operating expenses include client entertainment and meals, advertising, postage and other office expenses.
Managing costs in both categories is essential to maintaining a fiscally fit business. Whenever your expenses increase, your profits will automatically decrease.
During prosperous times, it is easy to cover up flawed management practices. It is during the lean times that poor practices are revealed and should be improved. Some of these practices might have been financial decisions that were meant to keep the doors open during lean days, but could pose serious problems.
Improving management practices might require changes to the current business model. Generally, your business model determines how you will make money, which is the primary reason that your business exists. Lean periods are the ideal time to review strategies and find out what is not working. You can make changes before it is too late. Review your competitors’ business models or other successful companies to explore new ways that you can generate more money.
Most businesses have operational issues that are ready for improvement. What worked in the past might not be the best approach to keeping up with changing times. Use an internal analysis or benchmarking process to identify the operational areas that can benefit from changes. Review national and international standards to learn what works best for other companies in your industry.
Keep employees, customers and suppliers in the loop to make sure there are no unnecessary disruptions during the change process. Once management flaws and operational practices are identified, you can implement changes that will keep your business on the right track. Closely examining business practices causes you to take a closer look. Knowing what does not work keeps you in tune with what it takes to manage periods of growth or decline.
Any business that wants to survive must make plans for success. While not everything follows the written plan, having one puts you in a stronger position with a roadmap for where you want your business to go. Your business is in the best position to thrive when changes are identified and implemented as necessary.
Fiscal responsibility includes having cash flow statements, balance sheets and pro-forma P&Ls to keep your business in the best possible shape. Along with having the right financial management tools, you will need to have a plan for following sound business practices. The revenue level you attain holds little value if most of it goes back out the door to cover excess expenses. Cut corners without compromising quality to add more money to your business’s bottom line.