Staying on top of your finances alone can be incredibly difficult and time-consuming, but it’s necessary for keeping your business on the right track.
But while most beginning business owners have a general idea of how much cash they have in the bank, many of them will be unlikely to provide an exact breakdown of their operational budget. They also may not know exactly how much their business is making or spending, much less if they’re operating in the black or green.
Unfortunately, many new business owners have limited visibility and awareness regarding the most important facts and figures. This may cause them to make risky or uninformed financial decisions that could put their business in jeopardy. As such, it’s crucial to identify the most glaring problems in your organisation’s finances so that you can address them ASAP.
However, trying to figure everything out through trial and error can be incredibly costly, not to mention take up too much of your precious time.
Instead, you need a much more practical approach: to consult an experienced financial advisor, one who can answer all the hard finance questions that are necessary for your business’s survival.
A reliable financial advisor will be ready to help you answer these six essential questions, to help you get a better idea of how well your business is doing (or not).
Am I spending wisely?
Before anything else, you’ll need to step back and get a bird’s-eye view of your business’s current financial health:
- How much are you currently spending, and where is your budget going?
- How much revenue is coming in, and from where?
- Do you have any outstanding debts or pending payments from your clients or customers?
- How much money do you have left after accounting for production costs and overhead expenses?
This will help you set a baseline for cash flow forecasting, the process of estimating how much money you expect to receive and pay out over a set period. This will help you identify if your current cash flow is sustainable, or if you’re in danger of running out of cash.
It can also determine whether your spending is generating more sales or if it’s simply draining your reserves.
What useful metrics should I be tracking?
As the owner, you probably have no idea which metrics might offer unexpected insights into your business.
Do you know the difference between gross profit margins or net profit margins, for instance, and if you should pay more attention to one over the other? Are these metrics more important than your organisation’s Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR)? Are you even tracking the correct metrics based on the nature of your business?
An experienced accountant can help define and differentiate metrics like these and more. At the same time, they’ll also make sure that you’re calculating your chosen metrics correctly.
Which business processes are the most cost-efficient?
The answer to this question demands a keen understanding of how much money you’re spending on different areas such as production, marketing, and human resources, and how much value you’re getting out of your investment.
With the help of a knowledgeable accountant, you can even identify any processes that stand to be consolidated which, in turn, can not only make your organisation more productive and efficient, but also save you a significant amount of money.
In the same vein, you can also figure out which business processes are not efficient, and if there are better ways of getting them done.
For example, perhaps you’ve realised that some of your back-office operations, such as accounting and warehousing, are taking up too much of your internal staff’s time and effort. If so, can you afford to outsource these tasks instead?
How do I determine which clients to keep or onboard?
In an ideal world, your organisation would be able to take on new clients while keeping all your existing ones. But given your limited bandwidth, your efforts may be best put towards clients who bring the most returns to your business.
If you’re not sure whether to let go of or onboard certain clients, an accountant can help you determine this by comparing the costs against the benefits of your working relationship with questions such as:
- How much does this client bring in, and how much of your current bandwidth do they use?
- What percentage of my business operations heavily depends on revenues from this client?
- How long does this client take to settle their invoices? Do they pay on time or are they often late and need constant follow-ups?
Your accountant can take the answers to these questions and then quantify them into exact figures, giving you a clearer picture of whether certain clients are worth keeping or not.
Am I paying too much in taxes?
Most business owners just want to get their taxes done as quickly as possible so that they can get back to their more important tasks. As a result, they may be rushing through things, not realising that there may be more practical or tax-efficient ways of doing so. This can happen at any stage of the business, even at the very beginning.
In fact, many businesses start out as Limited Liability Partnerships (LLPs), as they typically cost less to set up compared to Limited Liability Company (LLCs).
But as your business grows, it may be more beneficial to transition into an LLC. This is because LLPs are subject to paying personal income tax rates rather than corporate tax rates, ranging from 0% for earnings below SGD 20,000 and up to 22% for earnings above SGD 320,000.
In comparison, an LLC pays the fixed corporate tax rate of 17%. Additionally, LLCs are eligible for corporate tax exemptions and corporate income tax rebates.
Am I prepared for future crises?
No matter how optimistic we’d like to be, the future can be quite unpredictable. To protect your business, ample preparation is key. To ensure that you’re prepared for any potential curveballs, an objective financial advisor can inform you about your runway through future cash forecasting.
Your financial advisor will walk you through all the scenarios that you may encounter, as well as their predicted outcomes. With this data, you’ll know exactly how each possibility will affect your business down the line, such as what would happen if a big contract is paid late or if a product or service doesn’t perform as expected.
This information will also help you decide whether it’s a good time to launch a new offer, expand your team, or provide a pay raise. Your advisor can also bring your attention to oft-overlooked details, such as if landing a huge client may also cause your costs to increase beyond your means.
There may not be any easy answers to these questions, but you can still get as close as possible to the ideal solutions and outcomes. Xero provides a strong foundation for all our accounting services and has certainly made number crunching so much easier, efficient, and even fun for our clients. But machines and algorithms alone can only get you so far. For your business to truly grow, you need the wisdom and genuine care that only another human can provide.
If you want to gain insights from your accounting data over and above compliance duties only, partner with a human-centric and service-oriented firm like Harvest Accounting today.