My Little Big Business

Do you ever wish your business could run smoother? That instead of chasing your tail trying to get work out the door, debtors paid up, and staff paid on Friday, there must be a better way to manage your finances? If you are a small business owner with no staff, things are relatively simple, it's all in your head. On the other hand, if you have 100 staff, you've got a good system to manage the money in your business, most likely with at least 2 full time bookkeeping staff and an accountant. But what about those in the middle? Maybe with 3, 5, or 10 staff? These businesses have grown from the one man, who kept it all in his head, and more than likely still does. He's still working flat out himself, except he now has to manage staff, deal with more customers, more suppliers, more overheads, more everything. Yet more often than not, margins are squeezed tighter, cashflow is under more pressure, and the figures make less sense than they ever did. You sometimes yearn for the days when it was just you, whatever you could do, you did, and whatever payments you got, were your own.

But what if you could borrow something from the 'big boys' playbook which would help your business straight away, and put more money in your pocket? The financial tools and ideas used by large organisations can sound overly complicated, but having implemented them for many of our clients, I've found they are exceptionally powerful for a business stuck in that middle ground. Let's take a look at three of these concepts which could help remove the financial guesswork from your business.

Overhead Absorption Costing

If you've ever wondered whether a certain job or product is making you any money at all, this is what you need to implement. Absorption Costing is an accounting method of allocating your overheads against each product or service you provide. There are several ways of allocating your overheads using absorption costing, and choosing the wrong basis can be as useless as not doing the calculations at all, but when you get it right it allows you to see exactly what each unit costs you including overheads, and also the difference between products, for example if you decide your overheads are to be apportioned by the amount of your premises which that job takes up, you could end up seeing that what looked like a profitable job might not have the margin you expected, because it's eating up your overheads. While it's a very simple tool to manage your costs and know exactly where you stand, it can be worthwhile going through it with someone who is trained in it and fully understands how to implement it, as there can be pitfalls such as picking the wrong unit for your allocations which can make the whole thing a waste of time. When we do this with business owners it's almost always surprising to see that the products they thought were their most profitable are actually being propped up by something else, or that big customer they believed they were relying on is just pushing cashflow through the bank, and not leaving any profits behind.

Cashflow Management

The methods used for cashflow management by large companies are ideal for a business which has just passed the point where checking the bank balance every day is enough. Up to now, you could just log in to your bank account and see where you stand. You knew in your head what you owed out, what was owed to you, and what work was nearly finished and ready to be billed for. Once you reach that stage of growth though where it's all just a bit more complicated than that, it can get to a stage where you've got no idea. It can look great today, but then PAYE and VAT are taken by Revenue in one go tomorrow and you're shocked by how close to the overdraft you suddenly are. As I always say, it's not so much about avoiding the Revenue bills, you can't really do that, but in my experience once you can see ahead and have visibility on what's going to happen, managing your cashflow becomes relatively easy. One of the simplest methods I've found for this from studying the larger corporations I've dealt with, is allocating future costs on an ongoing basis, before they need to be paid. There are highly complex calculations for all this, but it can be broken down to simply seeing a cost before it's to be paid and putting money aside towards it ahead of time. This is probably an oversimplification, but in a nutshell that's it. The problem isn't money, its planning, and once there's a proper system in place to manage it everything just falls into place.

Budgeting and Variance Analysis

Of the three we've mentioned here, this one is probably the most difficult to implement. This is because we all do a version of budgeting already, even if only in our heads. Some of us even do it out on paper or on the computer, which is great, but usually we all miss out on the most important part of budgeting, the variance. Anyone can make a guess at what's going to happen, or maybe what they hope will happen, but the key to budgeting is what you do when you guess wrong. Mostly, it doesn't get a second thought. The budget was wrong, and people decide confidently, "you just can't predict the future". This is true, but what you can do is learn from the difference between your predictions and reality and find out why they're different. For example, if you had budgeted for a profit of €5,000, and in reality, for that period you made a small loss, there's no value in your budget unless you compare it with the real figures, and see exactly where the difference is. You can see if sales were lower than expected, costs higher, more material used, price increases from suppliers, etc. Once you know exactly what caused the difference, you can plan for that in the next month or quarter, to make sure it doesn't happen again. In a nutshell, that's how a budget can make a difference, not in looking forward but in looking back, which then allows you to look forward with more clarity.

Thank you for taking the time to read, and I hope it has been of value. If you feel you're not completely sure which jobs are profitable, cashflow surprises you, or your accounts are something looked at once a year then it might be time to start running your finances like a Little Big Business. Please do not hesitate to leave a comment, or reach out to us at info@jesinnott.ie.

Be advised that the information provided in this blog post is for general informational purposes only and does not constitute legal or tax advice. While we strive to ensure the accuracy and completeness of the content, it should not be relied upon as a substitute for advice tailored to your specific situation. We are happy to provide this should you require assistance on any of the matters outlined above.