In the dynamic world of business, financial controls are essential for sustainable growth and stability. They are the backbone of a company’s financial health, ensuring that resources are used efficiently and risks are managed effectively. Without them, there is no clear rationale for managing cash flow in your business. Some of the key areas where these controls can make a significant difference include the timing of major business purchases, hiring practices, employee credit card management, distributions to owners, and staff pay scales and incentives.
The Timing of Major Business Purchases
One of the most critical financial controls is the timing of major business purchases. Proper timing can prevent cash flow issues and ensure that a business remains solvent.
With all purchases to elevate your business, you must assess which expenses are “needs” versus “wants.” Not all purchases are urgent. They may feel urgent, but upon reflection, they are really just strong “wants” for the business. For instance, upgrading office furniture might improve aesthetics and give a cozier environment for team members, but it doesn’t directly contribute to revenue generation and in reality, it is more so a luxury expense.
An urgent expense would be purchasing large materials for a construction project or purchasing a new computer for a new employee you just hired. Both these are absolutely necessary for progressing the business forward. Do you really want your staff to share computers? I didn’t think so.
This is where the magical “budget” word comes into play. Allocating a budget for these significant purchases and sticking to it prevents overspending. “73% of people don’t regularly follow a budget. While a budget can help you control spending and avoid debt, only a minority of people actually stick to a regularly updated budget.” We all know that budgets are beneficial, but very few people really stick to them!
The biggest way you stick to a budget is by making a hard line in the sand with your business. After a year and a half at Get Better Bookkeeping, we decided to draw a hard line by “always earning a profit every month, no exceptions.” We no longer made excuses because “collections didn’t come in” or “we need staff even if it financially doesn’t make sense.” Even if it’s a profit of just $1, the decisions we make every month now fall in line to this rule. The most effective way to respect a budget is by establishing an adhering to non-negotiable rules.
This all helps you understand when you can make strategic purchases in your business. Maybe you can’t move into a larger office space right now, but after six months of profits and more consistent income, it will fall within the budget to afford being in a larger office! It’s like the good ‘ol fortune cookie says, “Failing to plan is planning to fail.”
When to Hire New Staff
As a company grows, it’s inevitable that you will need to hire new staff. This is a very consistent way that business owners run out of funds, by not having financial controls that determine when hiring is financially responsible. Unplanned or poorly timed hiring can lead to unnecessary financial strain.
You first want to create some “Demand Forecasting.” This is a fancy term for understanding the level of business activity (or the revenue you need to generate) before hiring someone. Understanding the business’s demand cycles helps in planning when to hire. For example, a retail business might need more staff during the holiday seasons, but this only makes sense if that holiday season truly drives a significant increase in sales. But how much of an increase does it need to be? 10%? 40% of normal, annual sales?
You also need to truly weigh the costs. You need to calculate the cost of recruitment, training, and salaries against the expected increase in revenue. For the retail example above, it might not be worth it to recruit, train a new person and have them work for just two months…unless (like mentioned earlier), it’s a dramatic jump in sales where if someone wasn’t there, the brand reputation and sales opportunities would be dramatically less. According to the National Retail Federation, “November and December account for 18.4% of total retail sales in the United States.” So for a $1 million business, they are selling $184,000 in two months ($92,000/month), while the rest of the year is at $816,000 in ten months ($81,600/month). This represents over $10,000 per month in additional sales, which is why hiring seasonal employees is a common strategy. It ensures businesses can capitalize on increased sales opportunities without losing revenue.
When you don’t make hiring decisions with these financial benchmarks and just say, “Well we’re really busy right now and want some relief…,” yes, it may be nice to hire someone, but you don’t know if you can financially afford it! Trust us when we say, it’s much nicer to wait to hire someone versus hiring too soon and then regretfully firing them.
When You Have Extra Funds and Profits
How owners manage what they do with their profits tells a whole lot about their long-term, financial well-being. Here are some of the financial controls you can put in place for what happens when you have extra funds.
Have a Minimum for Emergencies: You don’t know when unexpected expenses may occur such as equipment failure, client payment delays, or business slowdowns. A typical benchmark for having “enough” in emergency funds is for covering a full month in expenses, sometimes just payroll expenses. Some experts say to have multiple months in savings set aside.
Pay Down Debts: “About 70% of small businesses have at least some outstanding debt…” and on many occasions, this was a very good strategic decision for future growth. But wouldn’t it be great if you could pay down that debt early? Or have the magical experience of zero debt in your business? By doing a great job managing cash flow, you can gradually chip down your debts and reach this land that approximately 25% of small businesses exist in.
Give Rewards and Incentives: For staff that are really going above and beyond, along with being a financially great month, provide rewards and bonuses with the extra cash flow. This same thing can be used to reward business owners for financially good months, quarters and years too! One of the important factors we believe in is having specific, measurable reasons for why someone is getting a bonus, with the most important reason being that the company actually made money.
Invest in Future, Strategic Purchases and Goals: Are you looking to purchase a new vehicle or piece of equipment? Looking to expand your office space because of the growing team? Wanting to expand into different service offerings which need some initial investment? Want to buy a competitor to gain more market share? All of these are good reasons for storing away cash reserves whenever you make money.
Financial controls give the business owners guardrails and benchmarks to always seek to achieve when managing their money. Otherwise, you’ll be wondering why you never have enough money to do what you want to do! These are the issues that we tackle at Get Better Bookkeeping all of the time. So if you need help, fill out the form here!
