In the aftermath of Brexit, confidence in the economy has plunged. Recent surveys by GfK and the Manufacturers’ organization, EEF found that the confidence of both consumers and manufacturers has fallen dramatically with consumer confidence in particular at a 26 year low.
As confidence in the economy falters, people and businesses are likely to hold off on spending and investment decisions, which could lead to falling revenue to your own business. It has therefore never been more important to ensure that you keep control of your own costs.
As the economic uncertainty is expected to remain, at least for the foreseeable future, now is a good time to take stock, monitor your current position and plan for the changing environment.
So how should you monitor your finances and ensure continued success?
Keep your records up to date
No matter how busy you or your team is, it’s important to keep your paperwork and finances up to date on ideally a weekly, but at least a monthly basis.
Producing detailed reports can show your incomings and outgoings and your profit and loss by line items (sales, direct expenses like materials and labour, and indirect expenses like rent, light and heating).
If you get into the habit of producing these reports periodically, then it is less likely that costs will slip under the mat and get forgotten. If you look at your costs months later, it is going to be much harder to what those receipts were for.
Think like an accountant
Detailed Review - Go through every single item on your profit and loss, no matter how small, on a quarterly basis and determine which items you can do without or where you feel you could negotiate better terms. Take actions or make adjustments as needed, especially when you notice that you’re spending more than you planned. However, its important not to cut key expenditure such as production related expenses or marketing as they could negatively impact your business.
Analytical Review - This involves a month-on-month comparison of your profit and loss line items. Look for exceptions where it increases or decreases by a certain threshold, say 5%, and understand why and what caused the movement. This is a good exercise and helps you highlight any exceptional events that occurred during the month, for example increased labour and materials due to a one-off project.
It is also a good idea to create plans periodically for the next few months. Where do you want to be if things stay as they or how will your business look if the economy worsens. By understanding where you’re income and expenditure should be, it’s easier to see if you are diverging from plan.
As you get used to monitoring how your incomings and outgoings change over time it should be easier to understand how your costs and revenues are affected by external factors such as the changing exchange rate or potential changes in corporation tax.
Keep a close eye on outstanding items
A regular review of outstanding aged items, like customers and suppliers, can really help you manage your cash flow. If you use accounting software, use your aged reports such as aged debtors, which shows you who have not paid. You can filter this information by the amount of days the payment is overdue, helping you focus down on where you’re falling short. Consider offering discounts to customers who often pay late, encouraging them to pay earlier, or start charging interest on late payments, to help you keep your business moving.
Often just reminding your customers is enough as they may be snowed under with their own paperwork or they may be facing difficult circumstances themselves. Ensure you’re invoice is not forgotten and in the worst case ensure that you are at the front of the queue rather than at the back.
Know how your business is performing
It might seem like common sense, but often when you speak to business owners who have ongoing project work, they don’t know if the project will be profitable until it’s complete. It’s important to manage your costs in a timely manner and take immediate action when you’re close to breaking even or making a loss. Accounting software like Kashflow can help you allocate costs, like labour and materials against your revenue on a project-by-project basis. This way you know exactly how profitable each project will be and the margin you can expect to earn.
Of course, doing all of the above will take up a lot of your time, or even the employment of a qualified staff member. That’s where job management software can be so valuable as it can handle administration quickly and easily and provide links into your account software so that costs or invoices don’t get forgotten.
By taking steps to manage your costs today, you’re protecting your business for tomorrow.
By Richard Harris, director at Okappy