23 Jun 2021
It’s the age-old debate: cash flow or profit? Whilst the two are undoubtedly related, they are certainly not the same thing and business owners must often sacrifice one at the expense of the other. In the long term, a business needs both positive cash flow and profits to continue operation, but which one should entrepreneurs be prioritising? Some say that “cash is king” whilst others argue that “profit is everything,” but what is the truth? Let’s take a closer look and find out.
What is Cash Flow?
Cash flow is the money flowing in and out of a business. It refers to available funds rather than money tied up in uncollected profits or hard assets. A business needs cash in order to continue operations; without it, the owner cannot pay suppliers, staff and utility bills, or purchase inventory. If your business is a car, then cash flow is the petrol in the tank – you can’t move forward without it.
There are three main types of cash flow:
- Operating cash flow: the amount of cash generated from regular business operations, such as sales.
- Investing cash flow: cash earned from investments, such as securities, property or the sale of assets. During a period when your business is actively investing, this number may be in the negative but it will become positive when these investments begin to generate a return.
- Financing cash flow: the net cash generated to finance the company, including debt and dividend payments.
Positive cash flow means that more cash is coming in than going out, and thus your business’ liquid assets are increasing. Negative cash flow means the opposite.
It’s normal to experience a short period of negative cash flow when you are investing in growth, since you must first spend money in order to generate more liquid assets in the future. However, a sustained period of negative cash flow means that your business is running out of fuel, and you need to take action.
What is Profit?
In a nutshell, profit = revenue – expenses. It’s how much money your business is left with after you deduct expenses from your total turnover. Again, there are three main types of profit:
- Gross profit = revenue – cost of goods sold. This includes variable costs such as materials and labour, but not fixed costs such as rent.
- Operating profit = revenue – business costs. This figure includes fixed costs but excludes tax, interest payments on debt and income from investments that are outside the realm of the core business.
- Net profit = revenue – all expenses, including tax and interest.
It’s important to understand the difference between these three figures so that you can understand which costs have the greatest impact upon your net profit.
Which is More Important?
Both cash flow and profit are important to the long-term success of a business but in the short term it may be prudent to prioritise one over the other. It’s possible to be in profit and yet run out of cash, and vice versa. Both matter enormously, but which one is more important depends on your current financial situation.
For example, a business may turn a profit each month but if that money is tied up in hard assets then they may be unable to pay employees and suppliers, and thus will eventually be forced to cease operations. In this instance, the business should prioritise cash flow.
On the other hand, a business may have a healthy cash flow but fail to make a profit due to substantial debt. Here, it may be prudent to prioritise paying off the debt in order to become profitable.
When a business fails to generate a profit over a sustained period of time cash flow will be negatively impacted. It’s important to balance cash flow and profit carefully, but this can be difficult to do – especially when you’re a busy business owner with a lot on your plate. For this reason, it’s worth investing in a quality accountant who can help you to maintain a healthy cash flow whilst generating a profit without losing your mind in the process.
17 Jun 2021
As a small business owner, it’s crucial that you manage your expenses well. In fact, Fundera found that 20% of all small businesses fail within the first year, so it’s vital that you develop good money management habits right from the very beginning. Small businesses tend to have smaller profit margins, so it’s essential to keep careful control of your costs. Here are five easy tips on how to better manage your expenses so that you can maximise your margins.
1. Start Immediately
The majority of businesses incur costs before they officially launch. It’s important to keep a careful track of your expenses before you even open your doors, be they virtual or physical. Even the smallest costs can really add up over time! No business owner wants to pay more tax than strictly necessary, so set yourself in good stead by carefully recording your expenses right from day one.
2. Open a Separate Business Bank Account
Opening a separate business bank account makes it infinitely easier to keep track of your spending because it avoids the risk of confusing business and personal transactions. You cannot claim personal expenses as business costs, and such a mistake on your tax return could result in a significant penalty. Furthermore, having a separate business account ensures that you won’t overlook any transactions and end up paying more tax than you should.
3. Use Accounting Software
Online accounting software makes it easier to manage your spending. Many programs allow you to upload pictures of your receipts and invoices and then organise them accordingly. This will save you a lot of time and prevent you having to manage a mammoth backlog of records all at once.
Furthermore, accounting software will provide you with a clear picture of your spending and even allow you to understand which costs generate the most significant return on investment. This is actionable data that will allow you to cut costs where necessary and focus more on profit-generating activities.
4. Create a Clear Budget
Creating a realistic business budget that you can actually stick to is an important step in managing your expenditure. You will then be able to monitor your performance against this budget and adjust it when necessary.
In order to create a realistic business budget, you must first calculate your income, then determine your costs and work out your profit from these figures. This will tell you how much you can afford to spend and allow you to set a cap on your expenditure. Be sure to review and update your business budget regularly; an outdated budget is of no use to anyone.
5. Take the ‘Little and Often’ Approach
Let’s be honest: as a small business owner, bookkeeping is unlikely to be your favourite task. Treat it like a household chore and take the ‘little and often’ approach. Spend a little time each day or week to record your expenses and measure them against your business budget. This will give you an accurate idea of what you’re spending right now and allow you to fix any potential problems before they spiral out of control.
Summary
Conscientiousness is the key to prudent expense management as a small business owner. By being proactive about bookkeeping from the very beginning of your business, you will find it much easier to manage your spending. A clear understanding of where your money is going is crucial if you want to cut costs. Furthermore, by creating a realistic business budget, you effectively devise a roadmap for spending that will make it far easier to make smart decisions when it comes to expenses.
2 Jun 2021
It seems like everyday we hear about another industry being threatened by the advancements in technology, but is accounting one of them? Cloud based accounting software certainly has risen in popularity in recent years, but Quickbooks and Xero are no replacement for living, breathing professionals – and here’s why…
Location Freedom
Before we dive into the main reasons why accounting software won’t replace traditional accountants, let’s take a moment to think about one of the ways in which it can enhance and improve their services: location freedom. Whilst you may sometimes want to sit down face-to-face with your accountant, using cloud software means that you need not choose a professional based primarily on location. It also allows far greater flexibility and convenience which is certainly conducive to a healthy working relationship.
A Smaller Tax Bill
Granted, accounting software is able to help maintain accurate records and automate calculations for your tax return, but it won’t help you take advantage of the latest lucrative tax breaks and incentives.
Tax regulations change all the time and staying on top of them can feel like a full-time job in itself. A software program might help you get the numbers right on your return, but it won’t spot new opportunities to save a hefty chunk on your bill. Only a living, breathing accountant can do that!
Advisory
Accounting software takes care of much of the ‘grunt work’: the calculations, the forecasts and so on. What cloud accounting programs can’t do, however, is offer advisory services. A computer simply doesn’t have the business experience, critical thinking ability and financial acumen of a real-life accountant. Software can crunch the numbers, but it can’t offer counsel.
You might think that the covid-19 pandemic had businesses turning increasingly towards AI accountants but in reality, this period of economic hardship has simply underscored the importance of advisory accountants.
Businesses have been forced to navigate significant and sudden changes in law, initiatives, deductions and the shifting economic climate. Accountants have proven invaluable in helping entrepreneurs to navigate these ever-changing waters. The pandemic has brought us into unprecedented economic times and as the world continues to recover, advisory services will become more necessary than ever.
Consequently, these days more and more accountants are focusing on offering advisory services and acting more like business partners than processors. An experienced accountant is able to leverage their experience and acumen to offer valuable advice and insights to their clients. If Quickbooks or Xero could do that, the monthly subscription fee would be significantly higher.
Accessibility
Rather than replacing human accountants, cloud accounting software may even render accounting services more accessible to startups and small businesses. Business owners can use software to handle the grunt work for a smaller fee, leaving more funds to invest in interpreting the numbers. Traditional accountants will not be replaced, but rather their abilities will be enhanced by the advancement of all.
Summary
Cloud accounting software is certainly helping to enhance and transform the work of traditional accountants, but there is no danger of human professionals being eclipsed by technology. Accounting software is a means to an end – and an effective one at that – but not an end in itself. As accounting software is increasingly able to take care of some of the industry’s more menial tasks, the role of accountants will not be eclipsed but will rather shift more towards an advisory one. Accounting software is certainly helpful for business owners, but there is truly no substitute for the shrewd financial insight of a professional accountant.
26 May 2021
Growing your small business can be challenging and there is a lot to think about. However, you did not go into business by yourself to take the easy route, and there are plenty of things you can do to grow your revenue. Let us look at four of the most effective ways to dramatically increase your turnover.
1. Create a Five-Year Plan
You would not head out on a road trip without a map, so do not attempt to grow your business without a long-term plan. You do not have to have every single detail figured out but creating a five-year plan will allow you to strategise effectively and create achievable short-term goals along the way – think of them as pitstops.
Schedule regular strategy meetings to measure your progress alongside your five-year plan and make any necessary changes if you are falling behind. Furthermore, whilst your long-term goals should not change drastically, they may need a little adjustment as the market shifts and evolves.
2. Create an Emergency Plan
If the covid-19 pandemic taught us anything, it is to expect the unexpected. In March 2020, the world quite literally changed overnight, and it will never completely go back to the way it was. Rapid market shifts can and do happen, and the businesses who survive are the ones who prepare.
It’s always worth having an emergency strategy in place. Think about what is most likely to go wrong in your business:
- How could you continue to operate if you had to close your doors for a month?
- What happens if there is a delay in the supply chain?
- How can you avoid making employees redundant during an economic downturn?
Use the pandemic as a learning experience and create an emergency plan so that your revenue will not suffer during tough times. It is possible to continue to grow your small business revenue during tough economic times, so long as you have an emergency plan in place and are prepared to be agile.
3. Gain a Deeper Understanding of Your Target Audience
If you want to grow your business revenue, then you should strive to learn as much as possible about your target audience. One way to do this is through customer surveys, but there’s also a lot to be learned by simply listening.
For example, if you’re looking to grow your social media audience, be sure to follow members of your target audience online. Observe them carefully: what type of content do they engage with the most? What kinds of accounts do they follow? How often do they post? Which social justice campaigns resonate with them?
Furthermore, try to have as many in-person conversations as possible with your target customers. Do not try to sell, just use the opportunity to get to know them and gain an understanding of how you can solve their problems. This knowledge will be enormously helpful in growing your business revenue because it will ultimately teach you how to sell to your ideal audience.
4. Prioritise Learning to Remain Agile
During the pandemic, the businesses that fared the best were the ones who demonstrated a high level of organisational agility. To grow your business revenue, you not only need to move with the times but actively leverage market changes to drive sales.
It’s vital that you don’t grow complacent; as a small business owner, you should always be striving to learn something new. It is the only way to stay ahead of the game. Make sure you stay up to date with current events, local news, online trends and changing customer behaviours. You can then use these changes to benefit your business, whether that is gaining good PR by partnering with a local charity or getting involved with viral online trends to grow your social media following.
Summary
There are essentially two aspects to growing your business revenue: planning and education. By planning for the future and preparing for emergencies, you can create a roadmap to ensure smooth and steady growth. Meanwhile, you must continue to listen to your customers and educate yourself so that you are able to take advantage of market changes and benefit from them, rather than being left in the dust. By being patient, putting in the work and pursuing these two avenues, you can grow your small business revenue steadily and effectively.
17 May 2021
Every business needs a bookkeeper, but there may be something that yours isn’t telling you. We’ve compiled a list of the most common secrets your bookkeeper most likely wishes that you knew to help you save time and money in your business, and get the most out of the services that you shell out for.
1. Don’t Ignore Audits
Of course, no business owner really wants to be audited but that doesn’t mean it won’t happen. Fortunately, hiring a bookkeeper reduces the chance that you will need to be audited and help you to prepare if you do have to face one. Don’t slack off and forget about your audit trails until you actually have to face one. Be sure to adopt a bill payment solution that automatically creates these trails for you by tracking every action in the system so that your records are as transparent as possible. That way if you do face an audit, you’re far less likely to receive a fine or lose your hair due to stress.
2. Use the Cloud
You’d be surprised at just how many business owners are resistant to adopting cloud-based accounting or bookkeeping software. Cloud-based technology can be used to centralise your financial information and make it accessible from anywhere, at any time. This is a huge time-saver and means that you won’t have to waste time and energy rifling through a crammed filing cabinet to double-check an old invoice. Furthermore, the cloud offers a range of security benefits. For one thing, permissions-based access gives you full control over which employees have access to certain information. Cloud data is also encrypted and heavily protected, which means that physical damage such as flooding or fire won’t destroy all of your records.
3. Remote Working is the Way Forward
Your bookkeeper no longer needs to do house calls. Virtual bookkeeping services mean that accountants and bookkeepers can do the bulk of their work without setting foot anywhere near your office. Cloud-based software means that your bookkeeper can handle all of their duties quickly and efficiently off-site, increasing flexibility and saving time for both parties.
4. Separate Your Duties
As a small business owner, there’s such a thing as being too trusting. Of course, no-one wants to believe that their employees would steal from them but internal theft is very common. In fact, research by the California Restaurant Association found that 95% of businesses have suffered from some form of employee theft. In order to prevent this, consider separating duties to limit fraudulent activities within your business. For example, the employee who handles financial transactions should not be in charge of recording them, as this makes it easier for them to misappropriate funds and cover up their fraudulent actions.
5. Avoid Double Data Entry
Double data entry means entering data from one system into another. Not only is this a waste of time, it also increases the likelihood that your records will contain inaccuracies, which could compound and create a big problem later on. Instead, integrate your technologies so that all of your records automatically stay accurate and up-to-date. Speak to your bookkeeper about how to connect your cloud accounting software to your expense management so that your records stay impeccable and you can put your time to better use.
Summary
By implementing the above simple bookkeeping secrets, you can save both time and money in your business. Be sure to take advantage of the power of cloud-based technology so that you don’t waste time on tasks that would be far better automated, or on commuting when you could be working remotely. Finally, remember to separate out duties to protect your business against employee theft and remember to keep your audit trails accurate and up-to-date.
9 May 2021
(And Four More Mistakes to Avoid When Choosing a New Tech Solution)
Using more software solutions in a company is quickly becoming the norm. But not all technology is the same.
Many entrepreneurs don’t understand the difference between a feature and a benefit. To begin with, features are something that a piece of tech offers. It’s a functionality of a program. In the case of power tools, interchangeable bits on a drill are a feature. By contrast, the benefit is the outcome of using those bits – you can drill holes of various sizes. Taking it back to the tech world, the benefits are the results that come from using a specific software in a business. Why is it important to focus on benefits instead of features? It’s because many features are superficial and look better on paper. Now, as promised, here are the other mistakes you must avoid.
Not Using Industry-Specific Software
Is all accounting software the same? Not at all. Unfortunately, a common mistake that business owners commit is relying on non-industry specific software for their accounting needs. Sure, some software may be easier to use. It may even have a convenient learning curve. But those reasons alone aren’t enough to make it a perfect fit for any business.
Using One-Size-Fits-All Software
There isn’t one piece of tech on the market that can handle every function in a company. In fact, putting all of one’s eggs in one basket is one of the worst mistakes anyone can make when buying new software. Accounting software is great for looking at the numbers and making projections. Meanwhile, an invoicing system can automate sending invoices and tracking payments. And other software solutions can handle time-clocking and managing inventory. It’s a mistake to assume that one program can do everything and do it well. Is there software available that does a bit of everything? Yes, there is. It’s just that you can’t rely on such solutions if you want to conquer your niche.
Getting Free vs. Paid Software
No one can dispute that the internet offers a wide range of affordable or free tech that companies can use to monitor and optimise systems and operations. But it is the paid software that comes with extra features worth having in business. It also comes with the ability and calibration to deliver better results. Starting out with the free version should be reserved for testing purposes before committing capital.
Thinking That Outsourcing is Bad
Some entrepreneurs believe that doing everything in-house is vital to success. Or that many tech solutions don’t need purchasing, nor require internal implementation and employee training.
Outsourcing holds the key to dispelling such beliefs. The fact is that it’s possible to outsource many systems, from accounting to IT operations and more. Sometimes, it can even be cheaper or save a lot of time.
Pick Your Tech Carefully
If you don’t use the best software for your business, customer base, and industry, you are only leaving money on the table. Not only that, but it can also blind you to the real issues that need solving. It always pays to do your due diligence when choosing tech solutions of all classes.
