Money is like oxygen to a business, the lifeblood which keeps a business going. While many say that they didn’t get into business to make money, a business that doesn’t make any money isn’t going to last very long. In a recent Hub Live, Elize Hattin sat down with Chris Harris, the founder of the Rockhampton Angel Group, to discuss the key features of good financial management.
Chris Harris is a man who wears many hats. He’s been an accountant for the past 21 years, has owned and operated CT Harris Chartered Accountants for 17 years, currently works as a financial planner and a managing director for two residential property development businesses as well as being a Dad to four children. Chris is a master at managing his finances and knows how to keep an eye on the things that really matter in a business.
The Critical Areas of Finance
Finance comes into every single area of a business, and it is key for business owners to be aware of their money. Chris has a simple model with three questions he always needs to know the answer to – How much money is in the bank, how much money is owed to them from their customers, and how much money do they owe to their suppliers and the bank? With a good understanding of these three aspects of finance, a business owner will have a much clearer image of their financial situation before making any important decisions.
Firstly, Chris recommends knowing how much money is in the bank. This sounds like a simple thing to understand by just looking at your accounts, but it can be a lot different to what you see. “Let’s say there’s $60,000 in your account,” Chris explains, “You might feel good about having that much to start with, but when you start factoring in the $10,000 of GST owed to the ATO, the $20,000 of Pay As You Go withholding from employee wages and the $10,000 of income tax that needs to be paid out, pretty soon you can see the difference between making a decision thinking you have $60,000 in your bank account and making the same decision when you really only have $20,000. It’s a matter of making sure you’re fully aware of how much of the money in the bank belongs to you and applying that number towards any decisions you might make.”
The second question Chris asks is how much money is owed from customers. For some, debtors or accounts receivable is something that can be easily lost track of when the business becomes busy. A business owner can be sending invoices and thinking everything is fine, but customers may be leaving the business, getting into financial trouble or are just not working with your business. According to Chris, the best way to keep on top of how much is owed to your business is to have a regular procedure or process to check in and see what’s going on. “It’s about more than just knowing that there’s $80,000 owing to you. You want to know who owes you what, how long it’s been outstanding, who has been contacted to follow up and what the response has been. You need to manage that relationship and make sure it works out well for all involved, instead of just sending an invoice and forgetting the Client once it’s been sent. Sending an invoice isn’t the end of the transaction, receiving the funds in your account is.”
Thirdly, Chris recommends that you should know how much you owe, either to suppliers or the bank. While regular supplier payments should be in check as they get looked at regularly, during times of business expansion, the amount owing can escalate rapidly. “Usually when there’s a spike in spending it’s a known strategy, like spending to expand to a different market or setting up an office in a different location. The important thing is to have some planning behind the spending before the spending decisions have been made,” Chris explained.
To keep track of these three aspects of finance, Chris recommends using a rolling 12-month budget that says where you are today and where you hope and predict you’ll be for the next 12 months. This is a more proactive form of budgeting and can be done in a program like Excel with free online templates. Creating a budget facilitates the creation of goals and plans to achieve those goals, setting budgets for things like marketing to gain customers, or a human resources budget to keep up with the required labour, or the rent required for facilities. By unpacking the process and breaking it down into the next twelve months, Chris believes it’s a lot easier to understand and follow a business strategy, re-working the strategy as necessary and as circumstances change.
The keys to financial management
As money is the lifeblood of business, financial management is like the act of breathing, regulating the money and ensuring the business is sustainable long term. For the person in charge, either the CEO, founder or owner, it’s key to always have a finger on the pulse of the finances while making decisions for the business. Some CEOs or business owners may try to push the responsibility away because they don’t see finance as their forte, but it’s key for the person making the big decisions in the business to have as much financial information as possible.
For a small business, a business owner may have a very full plate already. This is where Chris recommends adding external advisors to help manage the business’s finance. “There’s really ‘a top three’ when it comes to external advisors. The first thing you’ll want is a good accountant who is familiar with your business and its performance.”
The second person Chris recommends adding to your team is a good lawyer. “While you might not be talking to your lawyer every day it’s useful to have one on hand for transactional things like signing a lease for a new building, building a new building, dealing with a trademark or patents, shareholders agreements or anything else that falls into that legal realm. You’ll want to have someone who is commercial and knows how to be able to work it out for your best advantage.”
Thirdly, Chris recommends adding a bank manager who understand the goals of the business. “You want a bank manager who is on board with the goals and overall objectives. You want to keep them as informed as they want or need to be. They’ll want to know what your future funding requirements are, such as if you plan to buy a building in two or three years’ time, even if you don’t know how much it will cost.”
While the advisors may vary by industry, having these three on board can assist a business with having overall better performance and reaching its goals. In the end, Chris believes the most important thing for a business to be is fiscally responsible in its decision making, and to try and generate the best return on investment. By following proper process when making a decision and turning the unknown obstacles into known risk factors, you can create a backup plan to continue onwards.
