Jaan Scott from Matchbox Associates Limited joined us this week to discuss how you can use the 5 key business drivers to leverage growth and profit from your business. Knowing how your business functions and how each part impacts the rest can allow you to optimise and prioritise certain areas depending on your goals.
Jaan began his own business in the 80s and had to largely find out how to run it on his own. There wasn’t as much government support and he couldn’t just Google for answers. He’s had over 30 years to understand the best way to measure a business’ performance and make good decisions based on the results.
The 5 business drivers being talked about today are: Cash, profit, assets, growth, people.
Financial literacy: a recent survey of small business owners showed that 46% had below-basic financial literacy. Many people have a cursory knowledge to keep the business afloat but aren’t too efficient when it comes to making the business profitable.
Why should you be interested in that? The average SME with a turnover below £25M makes around £8,000 profit a year, and fewer than 43% of businesses in the UK last 5 years.
There are 3 financial statements that represent value: cashflow, income statement and balance sheet. Read on for an overview of what each statement can be used for, as well as a breakdown of vocabulary.
Using financial statements
Monthly, quarterly and annual report which tells us at a glance how much you’ve earned and spent. It tracks total income, total cost of goods, total cost of spends and shows net income. This is the best statement to use if you want to increase sales or pricing, be more efficient or cut costs.
This is a snapshot of business health and monitors assets, liabilities and equity. Having the right asset at the right time can be key, but it also shows you what can be liquidated into cash if need be. The Balance sheet is constantly being updated, so it becomes out of date quite quickly.
Assets – cash or anything that can be turned into cash (property, equipment, intellectual property, investments). Current assets are anything that can be converted within a year.
Liabilities – financial obligations such as debts, loans and expenses. Current liabilities are those that must be settled within a year.
Equity – the amount of money returned to shareholders when all assets are turned into cash and all debts are paid (profit).
Assets = liabilities + equity
Asset utilisation considers anything that may create a profit, whether or not it is doing so currently. This typically includes equipment, IP, back-ups and environmental activities.
Contingent liabilities – In the notes section of the balance sheet you should include contingent liabilities. These highlight unrecorded obligations that are expected to occur in the near future. For example, if you are aware a court case is about to take place, but the result is unknown.
Often, business failure can be attributed to underestimating cash needs. Cashflow statements are often more reliable for finding out the true position a company is in. It is prepared weekly, monthly, quarterly and annually.
If you need to free up cash, there are a few things you can do.
- Accounts receivable (collect payments faster)
- Accounts payable (pay off others at a slower rate)
- Manage your inventory (improve efficiency and create les waste)
- Manage capital expenditures and increase revenue by decreasing the amount of outgoings you have (buy less)
Operational cashflow – how much money was spent or earned running the business
Investment cashflow – buying or selling assets
Financial cashflow – the amount of money assigned to repaying loans and debts, paying dividends, issuing debt and shares, or buying back shares.
Net cashflow – all of the above
How to measure growth
There’s no one way to measure growth; it depends what the business owner values. However, saying that, when people are buying companies there are certain growth indicators they will look at: sales; profits; number of employees; number of customers and company value.
Start-ups need to grow quickly in order to bring in revenue, cover costs and start making a profit. For mature businesses, increasing liquidity can also protect from future risk.
Engaging employees is one of the best ways of ensuring your business grows. These are the people that make everything else happen’ so provide them with a goal they want to work towards. Make sure you’ve got the right people working on the right problems to work efficiently, and that they have a strategy to follow, whether that’s bringing in more customers, releasing more products or saving costs in production.
When you’re looking at how to grow, you need to focus on one area. For example, revenue can grow without increasing customers if existing clients buy more. By selecting a goal, you will be able to ascertain which driver is most important to you.
Jaan’s final takeaways were:
- Commit to building your business acumen in the same way as you commit to starting a new enterprise.
- Focus on becoming more aware of your own business, the industry that you are in, how competitors and competition is evolving and performing, how customers are behaving, what’s happening with suppliers.
- Align your resources to your business strategy and be clear on how you intend to leverage the relationship between the 5 business drivers to maximum the opportunity for your business.
Did you enjoy this month’s networking? Let us know!