If you budget in January every year, you’ve actually already lost a month. You should be budgeting in September for the next year so that you can implement any changes by the time it comes to performance reviews in November, and hit the ground running the following year.
What many business owners do is to decide on a revenue target and simply divide that amount by 12 to get to monthly goals. They don’t, however, measure their progress at the end of every month and tweak their strategy according to their results. If, for example, you set your goal as R10 million a month, but you only bring in R8 million, that R2-million shortfall needs to be accounted for elsewhere in order to hit your annual target. Think of it like a 12-hole game of golf. If you want to end the year on par, but you’re two over par on the first hole, you need to be two under come the next hole.
Unfortunately, what tends to happen is that you get six months into the year and realise you’re not going to make target, so you lower it. Don’t change the goal! Change your plan to achieve the goal. This takes discipline. It means tracking your progress every month and tweaking what you’re doing along the way. You need to have sight of your income statement and balance sheet, but not the one your accountant has just completed from two years back.
Within a week of the month-end, you need to be looking at the management accounts from that month to be able to get an accurate picture of where your business stands.
You might be hitting your budget according to your books, but cash flow may still be a problem. You need to build your cash-flow into your budgeting process, which means you need to understand it. For example, we had a client in Cape Town who thought his clothing business’ biggest problem was that a large retail group was pushing his 90-day account into 120 days. In actual fact, the issue was that he was buying stock three months in advance to take into account import times, so his “cash-flow gap” was actually six to seven months, which was difficult to sustain. Once he understood this, he was able to re-strategise and renegotiate contracts and payment times where necessary.
It astounds me how few businesses make managing debtors’ accounts part of their financial process. In fact, many don’t manage debtors because they don’t see them until their accounts are at 120 days (which goes back to the point of checking your financials every month).
We had a client – an accounting firm, would you believe it – that was ready to write off R800 000 in bad debt. Within four weeks, however, we had managed to bring that amount down to R200 000 just by following up with debtors.
Document a process of how you handle debt – what happens when, from the first polite reminder to a final letter of demand – and stick to it. You’ll be amazed by how much lower your bad debt is.