Businesses never go bad overnight—there are always warning signs. So, what to do if you are seeing red flags every way you turn? Blake Dennis finds out
Sometimes, it is just a feeling; other times it is what you are seeing within the walls of the practice. It could be as simple as those disturbing figures on the balance sheet that refuse to lie.
The signs are there, letting you know something is not right with the financial state of the business. The action you take once those signs are spotted, however, can make all the difference to how you weather the storm.
“Way too many small businesses are in set-and-forget mode when it comes to financial management,” says David Henderson, chief executive of accountancy group, ROCG Asia Pacific.
“It is not unusual to find many rigidly sticking to certain ways of doing things, even when small warning signs should start to trigger major alarms. Far too many claim they are too busy running the practices to worry about things such as cash flow.”
If the signs are there, this is not the time to bury your head in the sand. We asked a number of financial experts about what are the signs to look out for and, most importantly, what to do about them.
“It is important to understand your cash flow,” says accountant Mark Williams of Sydney’s Caunt and Lowbeer. “By maintaining an accurate forecast you will be able to identify if your business is turning bad. By comparing your actual income and expenses with your forecast, you will be able to identify areas where your business is under performing. It is imperative you are able to pay your staff and your creditors, and determine if you could survive if you had no cash flow at all for 28 days. If not, a new plan needs to be implemented.”
Less than three months of readily available cash
“Maintaining a buffer of cash [emergency funds] is most important,” says Smart Advice financial planner Peter Horsfield. “If you are financially stressed, this will most likely affect how you react to others, your decision making process, personal health and your wellbeing. Knowing you have at least three months of cash reserves to cover your personal/business expenses allows you to ride out the ebb and flow of business seasons.”
Difficulty paying creditors
“It never makes good financial sense to pay your suppliers early, unless you are specifically offered a discount to do so,” advises Rhondalynn Korolak, Imagineering Now business coach and the author of Financial Foreplay. “Every day you can keep money in your bank account and not pay it out is very valuable to your practice. Bills should be paid consciously and deliberately after first examining your bank balance and your cash flow forecast.”
Not paying yourself a salary
“If you’re not paying yourself a salary then you need to seriously ask yourself what immediate actions need to be initiated,” Horsfield suggests. “Managing income and expenses is the life blood of business. However, as the owner, you are taking on all the risk. It is essential you pay yourself first. If this means you have to relocate to a smaller and lower cost premises, this should be considered. Keeping your business expense and income ratios well balanced also adds to the resale value of your business.”
An overflowing storeroom
“Inflated inventory holdings are a key place where cash can get trapped,” Korolak says. “Never carry more than one month’s worth of demand. One person at the practice should be charged with the task of analysing product sales each month—keeping slow-moving items to a minimum, liquidating dead stock and preventing the re-ordering of unnecessary stock. If assets are not productive, the return on assets will decline, indicating the business is making less profit.
A lack of operating systems
“Within 24 months of opening the doors, the practice should be moving to a systemised process,” Horsfield advises. “If a practice wants to build scale and leverage time, it must implement processes that either are automated or allocate minor tasks to staff with a lower cost base. For example, if a vet practice owner is treating patients and then also ordering stationery, the system needs attention. These tasks can be designated to support staff, freeing up the higher income generating practitioner to maximise their time doing more profitable activities.”
High staff turnover
“If you are losing staff regularly, this is a very real warning sign you need to take stock,” Williams says. “You need to create a culture where staff want to stay. Whenever an employee leaves, they are taking with them business knowledge. A receptionist who has been with your business for over one year has probably become familiar with your systems and has come to know your patients. The loss of a practitioner may also result in patients leaving.”
Rapid pace expansion
“Vet practices are among the most profitable businesses to run in Australia,” Korolak says. “It’s easy to get caught up in the momentum and take on debt to expand quickly without having a strong foundation and management systems in place. It makes sense to ask for help to ensure that you have systems in place to grow profitably and create enough operating cash flow to survive the growth phase. An over-reliance on borrowed funds can lead to wealth erosion and bankruptcy.”
No new patients in months
“This is an early warning and serious sign your business may be failing,” says Williams. “Even if you currently have many patients, change can happen quickly as existing clients relocate or decide not to visit as regularly. It is crucial to keep attracting new clients. Conversely, if your existing clients are not returning after 12 months, then this could also be a warning sign that your business is not doing well.”
Increased marketing over a prolonged period
“This often indicates the business is chasing new customers and not retaining current ones,” says Korolak. “Focus should be on re-bookings and offers to get customers to return. Asking each customer for a referral costs nothing and is infinitely more likely to result in a new customer than money spent buying advertising to an audience who may never read your advertisement.”
Try other methods, learn about content marketing or increase your social media presence.