Success starts with a good financial strategy.
It is part of the enduring conflict between working in the business and working on the business. Small business owners focused on creating and delivering their product or service may neglect the strategic activities that keep the company healthy and growing.
Things continue along with happy customers and busy employees, but you realize something is out of sync when you review profits and losses. It’s an indication that it is past time for a full financial audit.
Audits are not just for when your business is approaching a lender, getting ready to take on partners, or being prepared for sale. Regular audits provide valuable information to help you build financial stability into your plans.
Here’s what you want to find out:
If there’s inconsistent cash flow. Yes, it’s possible to be profitable but run out of cash, and that’s not good! Long-term success is about your company’s ability to maintain positive cash flow. If you don’t, you won’t be able to pay your monthly expenses.
If you have enough working capital. Separate from cash flow, working capital is a measure of your company’s short-term financial health and operating efficiency. It is calculated by subtracting your current liabilities from your current assets. If you have positive working capital, your company can pay off your short-term liabilities at any time. Negative working capital means you do not have that ability.
If you’re keeping on budget. You can’t just hope you have enough to pay the bills. If you developed a budget, are you sticking to it? If not, what adjustments are needed?
If you’re unprepared for unforeseen expenses. You will need resources to pay employees, vendors, and suppliers during a slump. You’re better off with a large buffer of reserves (around six months’ worth). If you have less than that, you are putting your long-term success at risk.
If you have too much debt. Debt is not unusual for a small business. However, it is possible to have too much of it. The trick is to manage debt with a good cost-cutting and speedy reduction plan so debt doesn’t become a trap.
If you’re consistently late paying the bills. Regularly late payments spell trouble. You are running the risk of damaging supplier relationships and being cut off from needed services. This is where the switch from manual to automated accounts payable systems can be tremendously beneficial.
If you’re out of compliance with tax payments. The last thing your business needs is to be paying penalties on top of your tax obligations. It will end up costing you time, effort, and money.
Bottom line: Regular financial audits give you a deeper understanding of how your business operates, uses money, and assumes risks. Set up tools to help you regularly audit your financial health so you can make good decisions about priorities and progress. If you need support with audits, reach out to your accounting professional for guidance.