The Family Business : Financial management for growth
(Part 2 of 3)
Majority of the Ugandan Family Businesses fall in the SME bracket, for a small or medium enterprise, managing finances efficiently is one of the keys not only to survival, but to prosperity. After working closely with SMEs most of which are family owned and managed you’ll notice a number of challenges most of which are perception related and can be avoided if one wants to grow a family business from a small business to stable enterprise for the long term.
Majority of the Ugandan Family Businesses fall in the SME bracket, for a small or medium enterprise, managing finances efficiently is one of the keys not only to survival, but to prosperity. After working closely with SMEs most of which are family owned and managed you’ll notice a number of challenges most of which are perception related and can be avoided if one wants to grow a family business from a small business to stable enterprise for the long term.
Most entrepreneurs in small and some medium size businesses believe an independent and fully functional finance function is not very necessary for growth, and where they are in place they are perceived to only be safe in the hands of relatives and relegated from main business activities to only periodical book keeping activities for tax purposes when that time comes. These negative perceptions prohibits the business from tapping the benefits associated with having a sound finance function that not only keeps records but also drives growth. The following are some tips for improving your business finances.
Regular Maintenance of records
Letting your finances take care of its self guarantees trouble. The best way to understand where your money is going (expenses), where it is coming from (revenues) and what that leaves you with (profits or losses),is through managing your accounts on a regular basis. Most small businesses and even some medium size businesses still see the finance function as a burden and a cost, ignoring its importance and only looking at financial records when the tax man knocks their doors. This will only keep you in the dark from realizing what is working and what is not working
Employ knowledgeable accountants
In a small family business a bookkeeper will maintain financial records of your business on a regular basis on top of the day-to-day payment of bills, issuing of invoices, chasing debts, cash management and record keeping. But as the business grows these activities can not be accurately done by on person, so the business should look at getting a team of much more knowledgeable talent that will not only stop at book keeping requirements but also move a head to analysis of the business operations to help maintain cost of operations at an efficient level and also plan and project for the business to foster growth. This is essential for keeping you in the know on which areas you should invest more and which ones are losing money, calculating and submitting accurate taxes and claiming for exemptions where necessary. It also frees you up to focus on the big picture (strategies for growth).Software versus paper
Employing the best team is one thing, providing them with the best tools to do a good job completes the picture. There is always this conflicting thought in the mind of most family business managers whether to put in place accounting software or continue on paper records. Software wins this battle every time in terms of accuracy and timeliness given a chance. Buying off-the-shelf accounting software like Quickbooks, Tally, Pastel improves efficiency and helps you manage financial complexity. For analytical and planning requirements Microsoft Excel excellent when used appropriately. Set up this system in a simple format, the less complicated your accounting system, the less likely something will go wrong. Ask for professional advice in tailoring an accounting system for your business
Prepare a Budget and Cash flow statements
A budget is like a map for your finances (Where you plan to get money from-Revenues and where you expect to spend- Expenses). With it you can track expenses and income and identify where cash flow needs improvement. A budget is also ideal for comparing your projections with actual performance. A Cash flow statement can be best explained as accurate and continuous answers to these questions formatted in a systematic and easy to understand table: Where is money coming from? When will it come to my account? Verse where will I spend it? And when will I pay for that expense? Diligent preparation and following of these two tools month in month out will keep in the know of where you are from and where you are going.
Knowing your break-even point
While preparing a business plan, the break-even analysis for the investment is an integral part, but have you ever thought that even on day to day operations requires break- even analysis? How much revenue do you need to meet your monthly expenses? Does that include all expenses salaries, utility bills, marketing expenses and all the others? Do you know your break-even point for each product you sell? That’s how many units you have to sell like in a month to cover monthly costs associated to that product? Knowing this helps you to know what to expect, the minimal effort and results expected from you team and also helps you plan for profitability.
Invoice early, delay payments as possible
One of the working capital management tricks past on from generation to generation that I still remember is that of “delay payments”. The truth of the matter is money is better off in your account than someone else’s. Send an invoice with goods while delivering, and pay invoices right on deadline. Where there are incentives for early payments consider these incentives your immediate cash requirements then benefit from them if possible and chase up unpaid invoices promptly. For family businesses realize that invoices to family or friend tend to be a pain to chase for there payments, so keep them at a manageable level and start follow up on time.
If one of your customers consumes a majority of your resources, it will be best not to wait until project completion to bill them. Negotiate with them a progressive payment schedule to balance out your cash flow.
Maintain a cash buffer
If possible, keep a cash buffer in the bank for unforeseeable drops in revenue. Sometimes clients have trouble paying bills or demand drops unexpectedly. If you have cash to cover a period of diminished revenue, you can ride out financial shocks.
Knowing your tax obligations
Tax is a complicated area and the fact that the tax man is not your daily customer or an employee sometimes you will forget him until he come knocking at the door. In a circumstance where you have a knowledgeable and fully functional finance function, make the best use of them if not employ an accountant to advice on tax matters. Areas like, Depreciation, tax exemptions, deductions, reporting requirements, filing VAT and preparing your Business Activity Statements are so critical in running a business if you intend not to be on the bad books of the tax man and avoid financial and non financial shocks related to defaulting.
Get expert advice
It is very prudent to ask for advice from experts and financial advice from advisers who know your business, or have work in the industry you are in for a long time to supplement on the good work being done by your accountants or help you accountants identify areas of improvement where performance is quit below requirements by regulation.
Finance functions should not be seen as a cost, but as a necessary partner for managing performance and growth.
