Monday, February 16, 2009

Is Your Small Business Fiscally Fit? by: Jennifer Deamud

When you receive the financial reports from your accountant what do you do with them? If you take a quick glance and put them in a file how do you know if your business is fiscally fit and financially stable?

However, if you're looking at benchmarks and metrics monthly, and using your financial information as the basis for all your business decisions your business is probably on the path toward being fiscally fit.

Small business owners often make several mistakes with their business financial(s) analysis and planning which handicaps their ability to be successful and grow. The four biggest and crushing mistakes are; not budgeting and forecasting, not knowing the break-even point and not analyzing the company's ratios and comparing them to the industry. And finally, many businesses expand without first making sure that the business can afford it. Many businesses have grown themselves out of business.

So what are the indicators of financial/ fiscal fitness and why are these aspects of business financials so important? How do they help you, the small business owner, meet the challenge to not only maintain and but also improve your fiscal fitness which is a key component of your competitive advantage?

Budgeting and forecasting help develop a business model, review your key assumptions and identify resources and capital needs. They can also be used as a management tool by establishing milestones and the accountability for accomplishing the milestones. Budgets and forecasts help identify risks and establish benchmarks. This will help the small business owner make the necessary adjustments to manage risks, reach milestones and measure up to benchmarks.

Knowing the break-even point for your business is a tool that enables you to plan for the future with a solid foundation. Break-even point allows you very accurately project how many sales you need to make, what you need to do to achieve that level of sales and even how much you can increase profitability by cutting.

Most small business owners focus on the growth of their business rather than profitability determining their break-even point. It's natural to focus on growth but profits are essential for any small business. Therefore, knowing your break-even point is essential to the overall business operation and is the key to strategic planning and maintaining and increasing profitability during the long term.

Ratio analysis is a method for determining the overall financial condition of your small business. It puts the information from your financial statement into perspective, helping to spot financial patterns that may threaten the health of your business.

For example, current ratio (current assets divided by current liabilities) is the standard measure of any business' financial health. It will tell you whether your business is able to meet its current obligations by measuring if it has enough assets to cover its liabilities. The current ratio should be part of your business' basic financial planning, meaning it should be tracked monthly or quarterly and compared to a baseline that is meaningful to your business. By keeping a close eye on this figure, you will recognize if it begins to get out of line. This will allow you to take early action to prevent your business from ending up in a difficult negative cash flow position.

Ratios are also very useful for making comparisons between your business and other businesses in your industry. For example, comparing ratios can indicate whether a business is holding too much inventory or collecting receivables too slowly. This comparison provides a window into ways your business can improve its operations. A number of sources, including many trade or business associations and organizations, provide data for comparison purposes; they are also available from commercial services.

Also making decisions to grow your business first requires a careful analysis of the current financial situation to determine your business' readiness for growth using all the previously mentioned indicators of fiscal fitness. Two essential elements in being fit to grow is a) the ability to generate cash from your current business operations to support future growth, and b) the level of your business' financial stability which gives you the ability to obtain external funding.

If you are making any of these financial fitness mistakes what should you do? You should speak with your accountant first, who should be a trusted business advisor. Accountants are extremely busy doing a difficult job against tight deadlines so they may refer you to a business consultant for an in-depth look at your financials.

The experienced business consultants at the Michigan Small Business and Technology Development Center™ (SBTDC™) assist small business owners one-on-one, at no cost, to understand their financials, and to use the above financial tools and analysis to become more fiscally fit.

In addition to talking with a business consultant, there are seminars that help small business owners understand their financials. Fiscal Fitness for the Growing Business seminar is presented by the SBTDC™ and sponsored by Fifth Third Bank. The seminar is offered statewide and provides business owners with an in-depth look at the essentials of using financial information to make effective decisions about improving their business performance. Thanks to the sponsor ship Fifth Third Bank, this seminar is offered at low cost to the participants.

Please see the link provided to register for the upcoming Fiscal Fitness for the Growing Business seminar on February 20, from 8:00am to Noon, Morris Lawrence Building, Washtenaw Community College. Cost: $25.00 reduced from $75.00 thanks to our sponsor 5/3 Bank.

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