BY JESSICA BOULERICE
Many people, particularly those outside the industry, are unaware that being the owner of a small or midsize operation is one of the hardest jobs out there. Long and late nights are a constant occurrence, pressure to provide for not only your family but also your employees and their families can keep you up nights, and the 24/7 expectation of the highest levels of professionalism can be hard to deliver. But there are ample positive and rewarding reasons for being a business owner in this industry, and there are countless businesses that positively impact their surrounding communities. At the end of the day, however, companies do have one primary purpose: making money.
Unfortunately, it is common for an owner or those at the highest levels of management to become so busy working in the business each day that they don’t have any remaining capacity to work on the business. Remember, a profitable enterprise must also include compensating owners for their time. Is ownership worth the effort if you could support yourself equally well working an easy 40 hours per week by letting someone else deal with the risk and stressful situations?
Almost all business owners have the desire to grow their operations over time, but how will you know when you’re ready? Do you know the strengths that might propel you toward growth or the weaknesses that might prevent you from achieving what you strive for? It is imperative to expand your business in a controlled and calculated way, and the first steps to adopting a strategic financial management mindset are understanding your existing state and testing your current financial fitness.
According to the Bureau of Labor Statistics, only 30 percent of businesses survive past their 10th year, and the most common driver of failure is capital and cash flow problems. Keeping a close eye on your bank account is an invaluable initial step in protecting your business from the same fate, but it certainly cannot be the last.
“According to the Bureau of Labor Statistics, only 30 percent of businesses survive past their 10th year.”
Small or midsize businesses in the growth phase should aspire to follow the same best practices that large and well-established businesses do—after all, they’ve stood the test of time! One of the most important best practices that you can adopt right away is treating your accounting and financial management team—whether in-house or outsourced—as business partners, not just bean counters. This likely means increasing expectations across the board. These business partners cannot simply gather and report data; they must understand how these metrics relate to the short- and long-term goals to advise you of the most financially efficient methods for making those goals a reality.
COLLECT YOUR TOOLS
A financial health assessment should span a multitude of areas, but you’ve got to start with solid accounting policies and controls. The foundation of successful strategic financial management is data. Without sound policies and controls, the integrity of your data is at risk and cannot be used to make informed decisions. Once the foundation is solid, data can then be analyzed to tell the story of your business results to date and then ultimately to set goals and plan for the future. The top priority for any bookkeeper or staff accountant in your organization should be to provide complete, accurate, and timely financial reports that are useful to the decision makers and complies with established company policies.
These decision makers can vary from one business to the next but generally comprise the owner or president and department heads, including at least one representative from your financial division. Following industry-standard accounting policies will allow for accurate benchmarking against industry metrics to help you understand market influences and identify areas for operational improvement. Developing a robust control structure within your organization will help safeguard against fraud, leakage, and regulatory liabilities.
PERFORM THE TEST
So are you ready to apply the test to your company? Once confident in the quality of those data, owners and managers can use it to assess strengths and weaknesses in the following areas:
❱ Profitability. No matter what the size of your business, profitability is a key metric that measures efficiency in operations. You should not only set goals related to a steady growth in profits over time, but also understand the norms of the industry to ensure that those goals are attainable.
❱ Liquidity. Profit margins tend to steal most of the glory in financial statements, but an equally if not more important measure is liquidity, or cash flow. There are many monthly cash outflows that do not impact profitability, such as loan payments on vehicles, but a profitable company will not be in business long if it does not have a sufficient, regular intake of cash to pay its employees and creditors.
❱ Debt levels. In a fixed-asset-heavy industry like chauffeured ground transportation, debt levels must be monitored religiously. Debt ratios are high on the list of potential red flags for lenders, and if debt levels get too high relative to assets, you may have trouble receiving the funding you need for growth as well as the maintenance and replacement of your fleet.
❱ Vehicle utilization. Vehicle expenses are the one of the largest cost-of-goods-sold line items in the industry, and much of the expense is incurred regardless of how much the vehicle is used. In some cases, if a vehicle is not being used even close to capacity, it can be less costly to remove the vehicle from the fleet and farm out jobs as necessary. Like profitability, it is important to understand the industry norms for vehicle utilization.
❱ Overhead expenses. It is equally as important to manage overhead expenses as it is to manage cost of goods sold. Work with your management team to truly understand each line item rolling up to your overhead or other expenses on your P&L. Raising awareness of how expenditures impact the business overall and their size in relation to revenue greatly increases the ability to keep those expenses in check.
❱ Receivables management. It is important to be aware of average collection periods and their impact on your liquidity when negotiating terms with large customers or planning for seasonal declines in business and large purchases. A cash reserve should be held for any new billed customers until you have a firm understanding of their payables process.
❱ Payroll. The single largest expense across the board in this industry is payroll, attributable to both drivers and office staff. Payroll metrics can assist in examining staffing levels to measure efficiency, implement pay-for-performance programs, address seasonal staffing needs, and plan for hiring related to growth.
❱ Re-investment opportunities. Once the above metrics are established, you can use data to forecast or budget for re-investment in the business. Do not forget to plan for costly software or office equipment upgrades and improvements to the facility. These necessary expenditures can become painful if cash flow is lacking and can force you into an unfortunate lending situation.
“Profit margins tend to steal most of the glory in financial statements, but an equally if not more important measure is liquidity...”
The list above is absolutely not exhaustive, but will provide tremendous insight into potential future issues. It also offers insight into how you can immediately begin safeguarding against those concerns. Any of these metrics can and should be analyzed, either retroactively or prospectively, against industry standards to add maximum value to the process.
Taking stock of these items can also result in a favorable side effect: immediate identification of high-impact improvements. In one excellent example, a few simple tests and a high review of financial statements revealed that a security deposit from many years prior had never been returned. One quick phone call resulted in the receipt of a forgotten $10,000!
Regularly assessing the financial health of your business will allow your management team to learn and adjust based on experience and changing market conditions. Using your baseline metrics, work with the team to identify and prioritize action items. At first, it may be difficult to identify the precise drivers of the strengths and weaknesses identified by the test—and that is OK. Keep those unknowns in mind as you work through the day-to-day, and they will likely reveal themselves to you in time.
Focus not only on improving the areas in which your business is lacking, but also in continuing financial successes that you’ve identified. Just like a personal fitness plan, accountability is key! Ideally, your financial fitness metrics should be tracked monthly, to provide real time insight into the impact of operational changes that have been made. At a minimum, commit to checking your progress quarterly. Test. Learn. Adjust. Profit. [CD02118]
Jessica boulerice is a financial consultant for the lmc group. She can be reached at jessica@lmc.Group.