Monday, February 3, 2014

Finance Tips for Small Business - interview with a CPA

Small business financial management
Every small business relies upon a foundation of sound financial management if it is going to grow and prosper in a sustainable way. Budgeting, cash flow control, taxation reporting, accurate record keeping, bank financing, trade credit terms, risk analysis – these types of responsibilities and decisions are of course crucial, and yet quite often many small business owners struggle in these areas.

Brendan Mills is a CPA and the founder of a business based in Perth, Australia, called CFO Dynamics. He describes his role as “helping business owners to gain greater control over their financial performance, so they can focus on what they’re good at”.
For over ten years Brendan has advised small business owners as well as senior executives of large firms, on how they can best achieve their profit goals – through a balanced approach to both maximising revenue streams but also containing and controlling costs.  I invited Brendan to share some of his finance experience with us and also asked him about his own journey in starting up his business …..

1.   Brendan, what motivated you to start up your own business?
There are a couple of layers to this question. I always wanted to run my own business so what influenced my decision to study accounting at university was my belief that accounting was the best degree for me to do to run my own business one day.
The decision to start my own business was seeing an opportunity in the market. From experience I believe a lot of consultants and accountants like to have their clients become reliant on them. Therefore, when they provide services and advice if they are removed from the picture the benefits disappear. We work on a principle of systemising and improving financial processes so the accounts department know what to provide owners/management and we educate owners and management about how to interpret the information and improve their business as a result, making us redundant.

2. What were some of the major challenges you initially encountered?
Two main challenges, the first was expected and the second unexpected. The first major challenge was generating leads because I had no contacts and contractually couldn't approach any clients from my previous employer. Even though the concept of an Outsourced CFO is not new but our goal of making ourselves redundant was met with scepticism to start with.
The unexpected challenge was the solitude. I like most people enjoy the social interaction of work and this is lost when working by yourself. I must admit I found this a huge challenge to overcome because working out of home (when not at a client) made you feel distant to the outside world.

3. What are the common mistakes you’ve seen small business owners make with their finances?
The most common day-to-day mistake I see in small businesses with their finances is not understanding their costs of production. Every business provides an outcome for their clients whether that is tangible or intangible. I break businesses into three types, "Buy & Sell" where you buy a product for a dollar and sell it for two (for example retail and wholesale), service where you provide intellect and knowledge to provide an outcome (for example a physio or lawyer) and "Value Add" businesses where you combine intellect and materials to achieve an outcome (for example manufacturing and construction).

Every single business has a cost of production to deliver the outcomes they provide clients and it is really important to know your costs of production and identifying the type of business you are will help you identify your costs of production. Regardless of how many or how few outcomes your business provides you must know what it costs to produce each outcome. The key factors you would need to factor include materials, freight and direct labour right down to the number of hours taken to complete the task. So few businesses understand their true costs of production but if you understand your costs of production you know what you can charge and determine the best course of action to position yourself regardless of what the economy/market is doing.

Another mistake I see is not taking responsibility for understanding their financials in relation to what they have done and where they are heading on a regular (monthly minimum) basis. There is a misconception out in the world that understanding financials is a difficult skill to acquire. The reality is they are learnable skills and the great thing about understanding financial information is once you understand them, they don't change. Financial data has not changed for 100 years and won't change for the next 100.
Plus nobody will ever care as much about your business as you do, so why outsource the responsibility of knowing your businesses financial status on an ongoing basis in terms of revenue, costs, profitability, efficiency and cash flow when you can do it yourself

4. What quick tips would you offer small business on managing their cash flow?

Firstly, if your single cash flow management strategy is to ring people who owe you money it's too late! I could talk about this topic for a couple of days so I will keep my advice short and actionable. It is really important to understand when you incur your costs through the production process and ensure you get paid by the client prior to incurring the costs. 
These are some simple examples …. If you run a service business you should be paid by the client at the very latest by the time of completion at each stage of the project. If you run a retail store you need to make sure you are holding and paying for stock and wages in a longer time period than what you are selling the stock in. If you pay your suppliers in 30 days then you must make sure you get paid in less than 30 days.

5. You’re a CPA – what have you learned about sales and marketing?
Great question, Accountants can't sell a jumper to a guy in the Arctic. Everything I have learnt about sales and marketing has been self taught either through personal experience or through reading sales and marketing books. My CPA training was invaluable but did nothing from a sales and marketing perspective.
I am a huge believer in you have to "add value to get value". If you are selling a product where people can touch and feel it is a lot easier to sell the product because of that physical aspect. When you are providing outcomes which can't be touched and felt it is really important to add value and impart knowledge which can help the prospective client prior to them investing any money. This helps you provide credibility and confidence in the client so they can "touch and feel" what they are going to get prior to outlaying a dollar. Therefore, I treat every sales meeting as an opportunity to answer as many questions as possible and provide them with actionable items.

6. When selecting an accountant, what do you think small business owners should consider?
You need a proactive accountant who is willing to "invest" in your story and in your ambitions and goals. They need to understand where you want to go so they can best advise how to get there especially from a tax perspective.
I believe they should also subscribe to the "add value to get value" philosophy because to often every single minute is charged to a client by an accountant (and other professionals) and I question the value of a lot of these minutes so look for an accountant who is willing to fix price their services. 
Lastly, don't be afraid to challenge your accountant. The most astute business people I have come across challenge you and want to understand why and how everything works, so they can learn and grow.

6. Brendan, are there any other final tips on managing or planning finances you would like to add in closing?
Invest in your financial education. If you can read, count and do basic mathematics then you are capable of learning all the business financial skills you require to be a successful business owner and/or higher skilled and valued employee. I'm not saying you need to turn into an accountant or bookkeeper but you need to understand how financial information influences where your business has been, where it is going and what you need to do to improve business performance. 
A shameless plug here, but let me add that I have just launched a website with this goal in mind.....we do three short videos a week free of charge helping business people understand financial information and create more profitable businesses.

Thanks Brendan. I think you’ve offered some nice simple tips on managing finances and I for one will be checking out your video. Whether we like it or not, developing the ability to interpret financial data is central to being able to navigate our business through a changing and sometimes volatile business environment

Here's a short video clip that features Brendan sharing a story about a small business owner who fell into a common trap with the financial management of his business

If you enjoyed this post, then another related post that might interest you is Tips for managing cash flow in your small business
About the author
Brian Carroll is the founder of Performance Development, a leadership skills training company based in Melbourne, Australia.  He is a qualified psychologist, experienced management coach and an engaging presenter, with a passion for helping people develop their full capabilities. He regularly delivers management courses in Sydney