SMEs (small to medium enterprises) are vital to the Australian and New Zealand economy. They contribute to 57% of Australia’s GDP (gross domestic product) and 27% for New Zealand. In New Zealand SME’s represent 97% of businesses, and account for over 40% of the national employment. As we know, going into business has a very high failure rate. In fact, over 50% of Australian SMEs have only been in business for 10 years or less. Further to this, only 43% of those small businesses made a profit right away. Here at Profit First Australia & New Zealand we’re on a mission to change that. And it all starts with education around money management.
When polled, 58% of Australian small business owners felt that good financial management was a top priority. However, the majority of business owners find it hard to manage the finances in such a way that they can build a business that’s both sustainable and profitable.
As Profit First Professionals we want to help businesses stick around for the long haul while enjoying profits. It’s important to us because the more business owners learn how to implement sustainable growth systems into their business, the better off we all are. Especially since small businesses employed 4.8 million people in 2017, which was a growth of 212,000 employees.
To do that, business owners need to learn the four business essentials to create a sustainable and profitable business.
1. Have Clearly Defined Goals
If a company wants to become sustainable and profitable, they must first establish clearly defined goals. And there are a few goal types that each business should focus on:
- Purpose Goals
- Partnership Goals
- Customer & Community Goals
- Financial Goals
Have an Authentic Purpose
You need to focus on WHY your business does what it does. Knowing this will guide your actions for everything from hiring employees to managing your customers, to even developing new products and/or services and sales.
The more focused you are on your purpose, the more easily you’ll build a powerful and recognisable brand that’s ahead of the competition. In addition to this, you will also have a business that is not just serving your customers but also serving you, the business owner.
Collaborate and Build Partnerships
No business succeeds without help. Collaborating with other businesses and building partnerships is a way for businesses to help one another.
Don’t try to handle aspects of your company you don’t excel at. There’s a tremendous wealth of resources available online from bookkeepers to marketing experts to help grow your business with ease.
Customer Retention and Community
It’s not just the support from professional services you need in order to succeed. You also need support from your customers and the surrounding community.
If you want to succeed at retaining loyal customers, begin a relationship with them at the initial contact stage and continue through the lifetime of the relationship. Do the same with the relationships with the people and businesses in your community.
The more you reach out and include them, the more likely they’ll continue wanting to help you throughout the years.
Financial Goals
Financial goals are created based on the above 3 goals – purpose, partnerships, customers. Determining your why, what, how and who helps you to work out the goal turnover for your business and the resources you need to make it happen.
It’s also important to consider what your personal financial goals are. Knowing your personal money goals is integral to understand what your business needs to provide in terms of owner remuneration.
Once your financial goals are established you can set targets to build your business towards. You can also set your pricing so that it’s profitable and helping you achieve your goals.
2. Set Profitable Prices
Not having the right pricing for your goods and services can cause major problems in both creating relationships and sustaining them.
If you charge too little, most customers may assume that neither your business or what you’re selling is of high quality. If you charge too much, you may end up alienating most of your potential customer base.
While it may seem logical, basing your pricing on costs or what your competition charges is not effective. To price your products and services effectively you need to have a clear understanding of:
- What it costs you to run your business
- What it costs to create/offer/run the product or service offering
- The customer value of your offering
- Your ideal profit margins (that nice buffer)
As you can see, to price offerings profitably you need to know your numbers. This ensures your sales are profitable. But that’s just one part of the picture. It’s just as important to manage the cashflow effectively so that your whole business is sustainable and profitable.
3. Track & Manage Cash Flow
A company can easily measure growth by taking a look at the following stats:
- Turnover/Revenue
- Profit
- Expenses
Tracking your turnover will highlight not only the sales your business is making, but it will show sales trends for your business. Recognising the sales trends can help you plan and manage your money more effectively.
Tracking your expenses will report not only where money is being spent, but can help with pricing your products and services, and refining your spending habits to make your business more profitable.
Tracking your profit highlights whether your business is growing, plateaued or heading for the red. This can influence your sales strategies and manage your expenses more effectively to get back in the black.
Reviewing these reports individually is not overly helpful, nor should you make financial decisions from them separately. However, analysing the three reports together – revenue, profit, expenses – will give you an accurate picture of the health of your business. You can then manage your cash flow more effectively to ensure your business continues to thrive long-term.
Cash Flow Warning Signs To Watch For
When tracking your cash flow, if you spot the following signs they’re a warning your business may be heading into some financial troubles:
- Using personal funds to cover business expenses
- Difficulties paying vendors, making payroll or paying yourself
- Only making interest-only payments on your business line of credit or corporate credit card
- Using business funds to pay for personal spending
- Converting your business line of credit to a note
- Not having enough funds to cover taxes every quarter
If you notice any of these issues we highly recommend you contact a finance professional such as an Accountant or Bookkeeper who is a Certified Profit First Professional.
4. Use the Profit First Method
If a company wants to enhance its profitability, it’s a smart idea to use the Profit First method. It works by using this equation: sales – profit = expenses.
This approach helps you develop a system to build your business in a sustainable way to create long-term success. After you account for your profit, taxes, and paying yourself, whatever’s left over is what you can spend on anything else.
This model also helps you determine which expenses can be eliminated, avoided, or delayed. This method forces you to discipline yourself to set aside a percentage of your revenue for profit while you only spend what’s left to cover your expenses.
How the Profit First Method Works
The first step you take using this method is to determine how you’ll allocate your cash by creating smaller “spending buckets”.
You do this by setting up bank accounts that are based on the core functions of your business, such as a(n):
- Income/revenue account
- Operating expenses account
- Owner’s pay account
- Profit account
- GST/Tax account
Thriday is an easy option to quickly set up multiple bank accounts and be ready for Profit First is just one click.
Then you determine your Current Allocation Percentages (CAPS) to find out where your real revenue is currently being spent.
Followed by using the Target Allocation Percentages (TAPS) to figure out where you want your real revenue to go once your business is operating at its highest levels of sustainability and profitability.
From here we start shifting your money management habits to bring you from CAPS (how you are managing money now) to TAPS (where you want to be).
A Profit First Professional is the best person to help you work through the implementation of the methodology and bring your business into a position of long-term profitability.
Work With A Profit First Professional
A business that is profitable can very easily become a business that stands the test of time. If you’re looking to implement Profit First and ensure your business becomes sustainable and profitable for the long-term, contact us to be paired with a trained and Certified Profit First Professional.
