The result is a few common financial growth mistakes that can be avoided.
1. Don’t focus on forecasts and forget about expenses
Many business owners optimistically focus on reaching revenue goals and forget about expenses, assuming that they can adjust expenses to accommodate reality if the planned revenue doesn’t materialise.
While the power of positive thinking is an excellent attribute, and should help you grow sales, it’s not enough to pay the bills. You can’t grow a business without positive cash flow, so never lose sight of both sides of the balance sheet. What comes in is as important as what goes out.
Tip: The best way to reconcile revenue and expense projections is via a series of reality checks for key ratios.
Here are a few ratios that can help guide your thinking:
Gross margin. What’s the ratio of total revenue to total direct costs during a given quarter or year? This is one of the areas in which aggressive assumptions are often unrealistic.
Remember that if customer service and direct sales expenses are high now, they’ll probably be high in the future. Be careful of any assumptions that make your gross margin increase from 10 to 50 percent. If this happens, relook at your numbers.
Operating profit margin. What’s the ratio of total revenue to total operating costs during a given quarter or year? Operating costs include direct costs and overheads, but exclude financing costs.
You should expect positive movement with this ratio. If you don’t see it, review your operating practices. As revenues grow, overhead costs should only represent a small portion of total costs, while your operating profit margin should improve.
Total headcount per client.Divide the number of employees at your company by the total number of clients you have. As the business grows, this ratio grows.
Review how many employees you need for each client and evaluate if you are trying to handle too many clients, and therefore aren’t providing enough attention to each, or if you have more employees than your business needs.
2. Don’t over-promise and under-deliver
Investors are occasionally fooled by numbers in the short term, but the reality is that in the end, the funded company almost always gets hurt.
Realistic budgets and projections could lengthen how long it takes you to find funding, but when the money does arrive, it will not only be honest money, but it should be based on a profitable plan that you can follow for years to come.
Remember: if you’re fiddling the numbers to fool investors, chances are you’re fooling yourself as well.
3. Don’t ignore your immediate budgetary needs
Many businesses try to ask for less money than they need, or they try to squeeze their own budgets too tight, cutting costs in necessary areas. When speaking to investors, be honest about your needs.
If you need R200 000 in growth funding, don’t ask for R100 000 and then fail in the endeavour. Investors would rather spend more money in a smart fashion than throw a small amount of money out the window.
From a budgeting perspective, don’t cut costs in areas that are necessary for the overall running of your business.
If you want to grow, you need to have positive cash flow, but this shouldn’t be achieved through cutting corners. Rather find areas where you can operate more efficiently and cut costs in that way.
4. Don’t assume that the existence of revenue is the same as being cash-flow positive
In almost every business transaction, there is a lag time between the finalisation of a deal and the completed cash transaction.
This is a fact of business and shouldn’t be regarded as a problem. However, you do need to be prepared for the lag time. Unfortunately, many business owners aren’t and they run into serious cash-flow problems as a result, mainly because they spend money that they don’t yet have.
Before you make a purchase, consider whether you need it right now or if it could be made in 30 days, when the available money is in the bank. Discretion and foresight can go a long way towards corporate growth (and survival).
During the course of running and growing your business, you will need access to both short-term and long-term cash savings to pay salaries, suppliers, or even to save for a future project or large payment. Standard Bank provides a range of flexible Savings and Investment solutions, with competitive interest rates, to help you meet your business’s savings and investment needs.
5. Don’t forget about SARS
End-of-the-day balances can often appear larger than they really are. Sales tax on revenues and employee withholdings may sit in your account temporarily but will ultimately be owed to the South African Revenue Services (SARS).
Your balance sheets should not count these finances as holdings, or you will run the risk of budgeting for future projects and costs that you won’t be able to afford.
6. Don’t mismanage the advertising timeline
Here’s a basic fact: Advertising leads to sales. The problem is that many budgets show advertising costs as a percentage of sales in the same period. To be truly effective, an advertising/marketing campaign needs to be initiated at least one period before sales can be expected.
When the additional out-of-pocket costs are taken into account, a healthy advertising budget is needed before any revenue can be assumed.
This means that failure to budget the appropriate items in a strategic timeframe will underutilise the finances needed to achieve these sales goals, and can lead to overspending in later months.
Formulating a vision is the hard part. Crunching the numbers is much simpler, but not always well followed. Entrepreneurs who treat their budgets with the same meticulous care as their other business components are the ones who survive.