In these pandemic times small business is exposed to the many challenges, one of which is the problem of cash flow management. So, they need to be flexible and stay alert in order to survive in these difficult times. Here, we would like to give a piece of advice from accounting perspective how to succeed in the business arena, utilizing the financial expertise and best practices.
We live in the times of fast changes. The coronavirus, global economic crisis, oil price decline and overall stagnation in the business world lead the large corporations to shrink their sizes, run regular lay-offs, cutting off its overhead costs and cost of product or service. Meanwhile, small businesses are entering the market with new innovative solutions. For example, Berikbol.kz design and 3D printed mask holders. There are still many talented entrepreneurs in Kazakhstan. You can find out about various start-up projects Startupnetwork and Profit.kz. With all small business representatives, I would like to share our accounting expertise and professional experience in managing an organization.
When starting any new business, the first thing to be done, besides marketing survey for the product or service success on the market, is the Business plan.
Before jumping into any capital investment, official registration and establishment of an office the start-uppers should evaluate the expected bottom line of the coming project.
Unfortunately, there are number of cases when the companies, having a Business plan in place established, still have no clear idea what should be its net financial goal. It is very common nowadays when the opportunities are open for everyone and anyone can start the business. But the competition rate is very high and the next question that comes up is how to survive in this competitive world.
The person planning a start-up should have a clear idea what she/he is bringing to the market, what is its target market and respective market niche, who are the main competitors, what is the client base, and how much the customer would pay for the product and what are the associated costs to be aware of the potential net loss or net income. To help them with that, the responsible finance team within the company should be involved into the project budgeting from the very beginning. The experience shows that quite often the business is up and running and then the owner starts thinking where the profits from the investments go and then starts seeking the finance assistance. When the business is growing at fast pace, but the accounting and reporting is lagging somewhere behind trying to keep up with the overload of transactions. And it is very difficult to bring onboard quality accountants who could resolve the accumulated debris of their overloaded predecessors and “clean up” the books.
To get a finance function support before the start of the venture, not after.
Engage the qualified accounting workforce and ensure the internal controls are set up from the very beginning to have all the reporting correct, all major procedures are outlined and comply with the reporting standards and all reconciliations are tidy.
When I was working in Dubai (UAE), we organized a conference for entrepreneurs and certified management accountants. And lots of them admitted that they did not hire any finance people for their stat ups, thus made wrong management business decision based on their gut feelings rather than on any financial numbers, that failed their business.
To stay tuned to the changes on the market, in the political and social environment and make quick management decisions to support the business.
Being small and making prompt business decision is the strength of the small businesses over large corporations. Small business can change the product/service, expand to the new markets or change the business specialization or add a new product line pretty quickly (consider the STIRDEEP methodology). Thus, business scenario planning is one of the good tools to be utilized for that various budgeting scenarios with different outcomes that could allow responding to the changing environment conditions.
It could be too expensive to hire consultants, but nobody said you cannot watch it out and monitor yourself for the coming changes and reforms as information is nowadays public and easily available. E.g. new accounting standard is being adopted soon – get ready, read what the implications are for your industry and check what needs to be done to get it implemented smoothly. Or higher VAT rate is going to be imposed – calculate what impact it may have on your business. It is neither the strongest, nor the cleverest one, nor the fastest one that survives. It is the one who can most quickly adapt to any change will survive. This concept of Neo-Darwinism can be easily applied to the law of running the business.
When the company is just starting, the zero budgeting technique could be used as that allows estimating the expected revenues and costs without any prior experiences. These should be the best estimates based on the market research and available quotes.
To employ the most appropriate budgeting technique for your business.
When company is up and running the rolling budgeting technique is more appropriate for the use as having some history at the fingertips and rolling forecasts could help in making business decisions to promptly respond to the change in activities. Continuously keep updating your budget vs actuals to understand the trend and explain the variances.
To consider a Break-Even Analysis for the small business operations, as it is an essential reality examination for potential viability of the business.
A Break-Even Analysis helps a Small business management to determine whether its fixed costs or overhead costs are realistic or needs to be reduced.
If the fixed cost of the business is too high for this small business, the company will need to make some changes: either negotiate a lower rent or reduce any other costs, or add an additional product line to grow its revenues, or move/expand to a new business area in order to improve the net results.
Those scenarios with different sales or purchase prices or overhead costs should be elaborated in the budgeting books (Financial Model) involving calculations of all the possible outcomes.
To prepare a full package for the Budget Statements Book.
Each of the statements is needed for the detailed plan which includes not only the revenues and costs, but also assets and liabilities with the respective cash on hand as marketing expenses, costing of products and services, income statement, balance sheet and cash flow, statement of equity and a list of assumptions, used in preparing future budgets. Stakeholders (customers, shareholders, banks, suppliers, etc.) need to be aware of these budget forecasts in order to understand how they will benefit from their business investments.
To set up the Balanced Scorecard estimating the respective budget for KPI objectives execution.
To finalize the budget package the company should develop the Key Performance Indicators (KPI) that is needed to motivate the management to achieve the set up goals.
The executive suit should have SMART (simple, measurable, achievable, realistic and time framed) objectives as the measure of the effectiveness of their management during the year.
The examples of the major KPI are:
- DSO (Days sales outstanding) is the number of days the clients settles our invoices with target of 30 days or less to help the business recover its cash form the customers, the management will then negotiate the better terms at the stage of signing the contract, and ensure the management set up the client relationship with customer’s management level and company’s in-house finance team sets up a good working relationship with customer’s payable finance team to ensure timely settlement of the invoices.
- DPO (Days payable outstanding) is the number of days the company settles the invoices of its suppliers with the target of 60 days or more. The rule of thumb is that DSO should always be less than DPO, in order to prevent cash deficits in the company.
Once I conducted the training on Cash management at the Be-a trainer conference by the Astana International Finance Center, where two lawyers attended my training. They had an insight why the payment terms are so important in the contract, and understand now how their job affects the cash inflows and outflows in a company.
- Equipment utilization rate to recover its depreciation costs, to ensure there is enough sales contracts in the pipeline to avoid equipment idle time, in the investment were worth spending.
- Gross margin at most efficient rate would be a good incentive for management to run competitive tenders in order to find right suppliers of the best quality raw materials/ labor costs at lower price, which would reduce the variable costs.
- Fixed & overhead costs limit not to be exceeded which indicate the effective spent on the sunk costs for the business.
- Inventory turnover ratio, as an indicator of the effective management of the inventory stocks, because high level of inventory lead to excessive storage costs, and undersupply of inventory may cause delay in the production process.
KPIs should be the focus of the management team to help the business cover its costs and generate cash.
To summarize all these tips, I would like to say that do not economize on the expertise, and do not underestimate the importance of time spent on the budgeting and scenario planning exercise, as good planning is half of the success. The other half is its execution and control.
Comparing actuals vs budgeted numbers will serve as a good indicator for the trend of activities and the ability of the management to materialize the potential budgeted revenue pipeline, correctly estimate cost of running the business, build right incentives and make vital timely business decisions.
Meet the expert
Audit Manager, Baker Tilly in Kazakhstan
Master of Arts in economics (МА)
Certified Management Accountant (CMA, US)