Planning for 2011 - Your target numbers (part2)

Growthwise celebrated our 1st Birthday on the weekend. Time certainly flies when you are having fun. It was great to look back at our results for the 1st 12 months in business and compare those to the targets we had set. It was also good to sit down and set some new targets for our 2nd year in business.

Last fortnight I challenged you to set some targets around your Profit and Loss Numbers & then have a look at a few different scenarios Planning for 2011 - Your target numbers. While this certainly can give your business a push along from a profitability perspective it does not set targets to improve the Financial Health of your business overall.

Most business are run on an accruals basis - that is you give customers an invoice & allow them to pay in a certain number of days, you pay your suppliers after a certain numbers of days and you pay the ATO for your GST & PAYG either at the end of each month or Quarter. Therefore your bank account balance will never equal the profit you have made in your business.

Improving your Businesses Financial Health therefore requires more than setting targets for your Sales, Cost of Goods Sold, Overheads and Profit. You need to set some targets for your Debtors Days, Creditors Days, Inventory Turnover, Working Capital Cycle etc. Let's take a look in a little more detail.....

Take your Debtors days as an example. This is the number of days on average it takes you to collect your debts. If the terms on your invoice are 30 days your aim should be to have your Debtors Days at 30. It's great to have an aim but to give yourself some motivation for achieving that aim it's even better to understand what not doing it means. Say your monthly business turnover (sales) is $100,000. Your invoice terms state 30 days however it takes you 60 days on average to collect your debts. So at any given time you can be owed $200,000 from your customers or 2 months worth of invoicing. If you have paid for your stock or suppliers or employees at the 30 day mark then you are funding your customers bad payment history. If you cut the time it takes you to collect your debts in half - ie it only took you 30 days you could have an extra $100,000 in your bank account! Would that make it easier to pay the bills!!!!!!

Do you ever get to the end of the month when you need to pay your suppliers & cringe. Do you ever pay your suppliers late? Do you struggle to pay the ATO or your Employees Super on time each month / quarter?

Sometimes a cashflow issue has nothing to do with your Profitability. It could mean that you do not have enough Working Capital (funding for your business). It could mean that your business is suffering from bad payers or that your Stock levels are too high. It could mean that your business is incorrectly funded - you have too much short term debt and not enough long term debt to match your asset base.

If an aim is to grow your business do you actually know you can afford to do that? Do you have enough Profit left to pay your Interest Costs (your Interest Cover)? Do you have enough cashflow? What are your Working Capital Cycle requirements if your sales doubled?

The banks have a few rules of thumb when they are looking at the Financial Health of a business. They look at these when you want a new loan and they also look at these as part of your existing loan covenants. Understanding these "rules of thumb" for your Business and Industry is vital to ensure your business success.

Remember the everyday decisions you make in your small business have a direct impact on it's Financial Health. So it's important that you understand the impact of these decisions & monitor your progress. What better way to monitor & make improvements than to set some targets & put in place an action plan.

Do you know the Drivers to your Businesses Financial Health?