Cashflow management may be one of the main reasons small businesses fail, but budgets and finances are the next two down the list.
Balancing the books isn’t easy, nor is budgeting and forecasting what your ongoing costs will be at any time. One of the big problems businesses run into when they start getting some good money is that lack of forecasting and financial planning can lead to disaster.
“Businesses tend to either overestimate or underestimate,” says Peter Strong, executive director of the Council of Small Businesses of Australia.
“They often make budget decisions based on their emotional decision…rather than the facts.”
Many SME owners didn’t get into business to run their finances so this is an area often left until last.
There are several ways small business finance can be improved – and much of the time it doesn’t involve having to be any better at math.
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Make data-led and informed budgets
As Strong explains, many businesses make financial decisions based on gut feel rather than looking at past data to get a feel for more accurate predictions.
“When businesses look at the next year, they tend to assume a lot of things like ‘oh, rent will only go up by CPI, or wages will be the same’,” he says.
“But have you spoken with the landlord about that? They might think something different. And if you have people leaving, are you going to replace them? Do you need that work to be done?”
Strong says SMEs need to be more realistic about their planning and always keep the worst-case scenario in mind.
Get the big picture
Little Real Estate is Australia’s largest privately owned real estate business with more than 400 employees across the eastern states, with offices in Melbourne, Sydney, Brisbane and the Gold and Sunshine coasts. The business has over 21,000 properties under management.
The company has recently been through a significant financial transformation – especially with the adoption of new reporting technology – and its success is a road map for SMEs looking to get a handle on their money.
Like many businesses, financial information within Little Real Estate was often housed on disparate systems, making it difficult to forecast. Rebecca Kerr, the company’s chief financial officer, says team members were forced to spend hours putting reports together.
“It wasn’t effective, and it ran the risk of data not being accurate,” says Kerr. “So we implemented a new finance system and budgeting tool to assist with the collation of data”.
With weekly operational reports required on properties under management, rental arrears and so on, there were many variables that could negatively impact the company’s finances. Having that data readily accessible better informs financial decisions.
“Previously, we weren’t able to provide that data to the board and the business in a timely manner.” says Kerr. “That was the key driver for us.”
Make financial data available to more people
The future of business is one in which data plays a key role, but democratising that data is just as important. Little Real Estate was able to prepare more accurate budgets by enabling and empowering each division to be accountable for their results.
“The traditional accounting software we used was quite simply unable to deal with our future growth strategy,” says Kerr.
Now, new technology installed by the business has enabled each division to spend less time compiling data – they simply run reports and have it visualised.
This saves the finance division a huge amount of time, and also enables more accurate reporting: decisions are made closer to the source which spends the money.
“We are seeing employees spend less time on compiling data and more time analysing it, doing the reporting and adding value to the business,” says Kerr. Adding a budgeting tool allows quicker access to the financial truth of the business so divisions could make their own informed decisions.
“That has allowed us to get more ownership around the whole budgeting process,” says Kerr.
Given that experience, what does Kerr recommend for other businesses to get a hold of their finances?
“A lot of it is about documenting processes and making sure they’re being done as efficiently as they can.” she says.
It’s important to challenge current processes, and ensure they are not followed just because it is how they have previously been done, Kerr says: any software solution, should then continue to build on these efficiencies.