The Keys to Financial Control

Establishing strong financial control is a critical element for a growing business.  The trouble is, you're almost certainly not an accountant and even if you were, it's easy to miss some of the important elements.

In this article, you'll find the key parts to establishing solid financial control of your business as it grows.

Being in control of your business finances is as simple as understanding four key aspects of money and then introducing suitable methods to keep them in check.  Let's look at these areas now...

1. Authority - Control The Who and the How of Taking and Spending Money

It’s a big decision to delegate the authority for making payments to any member of staff.  It’s important that you have checks and balances in your business to prevent funds from being moved without your ultimate permission.

Staff fraud is relatively rare, thankfully, but not uncommon.  If your business takes payment in cash from customers and your staff are handling the cash, you will need some form of reconciliation to compare sales with the money you’ve taken.

If you ask staff to pay money into the bank, you need to know that the right amount has been deposited.

These basic controls are a start, but there’s another level for a business that’s grown and has a finance department that is able to raise invoices and pay suppliers.  For these you need the ability to confirm every invoice is real, and that every supplier is genuine.

One of the most common ways to steal money from an employer is to create a fake supplier and then to pay them.  Being vigilant is a good start.  Having regular checks and occasional audits will give you more confidence.

Deciding who has the right to make payments, set up new suppliers and customers, raise invoices and so on is an important decision - take it seriously and don’t trust your judgement implicitly, but follow up with regular checks to ensure your trust has been well placed.

2. Cash Flow - Control How Much Is In The Bank

In something like 80% of business failures, the single reason they have failed is simply running out of cash.  When the bank account is empty, staff cannot be paid, suppliers stop delivering and customers are left empty-handed.

It’s a horrible situation and gives life to the old saying that turnover is vanity, profit is sanity, but cash is king.  A business does not ultimately fail because it is not profitable enough, but because it runs out of money.

The key to controlling cash flow lie with the way your business controls the movement of money.

Understanding the ‘cash gap’ in your business - this is how long it takes you to recover money from customers after doing the work, and after paying suppliers for their part in it, is at the heart of controlling cash flow.

To help maintain a solid cash flow you need to understand your working capital requirements - this is how much money is tied up doing work for customers that are yet to pay, or in holding stock that is not yet sold.

Keeping stock levels to a minimum, agreeing favourable terms with suppliers and having strong credit control procedures to collect payment from customers are all important financial controls for the cash flow of your business.

You can also design the way the business works at a more strategic level to operate with less cash tied up in operations.  Smart processes with stock control can massively reduce your working capital and make a huge difference to your cash flow.

After ensuring the physical security of your money, getting cash flow under strict control has to be your priority.  After all, cash is king.

3. Margins - Control The Profitability of Your Business

Your profit margin is simply how much money you make for each product you sell, from each customer you serve and from each project you deliver.  The amount of profit your business produces is a balancing act between your pricing and your ability to control cost of delivery.

Far too often a small business charges too little and operates inefficiently so that money is lost through the way you serve customers.  It’s really easy for your business to operate with poor margins without you realising it.  The easiest way to check is simply to look at the profit and loss report at the end of the month, quarter or year.  If your gross profits are only average or below in your industry, you have a problem that needs to be addressed.

Establishing controls to monitor the profitability of your business means looking at the margins of what you sell, and also keeping a careful eye on the fixed costs of running your business.

4. Balance Sheet - Control What Your Business is Worth

Your balance sheet tells you how much your business is worth.  It’s like a snapshot of how much money it has, how much money is owed to you and how much money you owe to others.  Controlling your balance sheet is about making sure that your business builds in value over time.

The balance sheet becomes increasingly important as your business grows, and it’s a critical part of gaining the confidence of potential investors in your company, along with the bank if you want to borrow money.  They will want to know if the business is carrying much debt and will have their own ways of calculating how much risk that represents to them before they will be willing to put more money into it.

A business that’s trading profitably but that has a big burden of debt on its balance sheet may not be a very attractive proposition to a lender or an investors.  Being in control of your assets and liabilities, which are the two big elements of your balance sheet, creates confidence that you know what you are doing and builds a solid foundation for trusting you when making an investment or lending decision.

Of course the balance sheet is also a crucial factor when it comes time to value the business for sale.  Normally the more valuable the asset base, the higher the valuation of the business.  One big exception to this is if you’re carrying a lot of dead stock.  This has high value in terms of what’s been paid for it, but perhaps has little to offer in terms of resale value if nobody wants to buy it.

5. How To Implement Controls

Processes and policies are the simple keys to controlling your business finances.  A process is simply a defined method of working.  With a process, things get the done in a particular way every time.  They make your business operate consistently and when it comes to controlling money, consistency is the key.