Once your business is operational it must be controlled - much like you would navigate a ship. A ship has a destination, your business has goals. To reach its destination, a ship has navigational aids to measure progress and prevent it going off course. Your business needs similar aids.
Business planning sets your vision, business goals and the strategy for attaining them. There is a close link between business planning and the control of business operations.
The control process measures progress towards your goals and enables you to identify deviations from the plan and implement remedial action.
Financial controls are critical but there are also other controls critical to business success. To control your business you need to:
- obtain reliable information about your business operation
- know how to use that information effectively
- identify and resolve problems before they become deep-seated.
There are four key areas where small businesses are especially vulnerable:
Control of cash Control of debtors Control of inventory Internal controls
The control of cash involves control in a number of other areas. Your cash position can be affected by:
- sales declining, with resultant fall-off in revenue
- debtors paying their accounts more slowly than expected
- an opportunity arising for favourable speculative buying not covered in the purchasing budget
- increases in the prices of materials, supplies, labour and operating costs
- a smaller proportion of cash sales and a larger proportion of credit sales than expected.
A cash budget can be used as a planning and control tool, but it does not do the control job. However, it will highlight financial tight spots and indicate weaknesses requiring attention. You should regard your cash budget as one of your most important management tools. Refer to it regularly and compare forecast results with actuals, at least monthly. Such a comparison shows how the business is performing and enables you to take corrective action when and where necessary.
If you are having problems controlling your cash-flow here are nine ways to improve your cash position.
- Promote cash sales.
- Obtain payment for credit sales more promptly through effective screening of customers seeking credit and by timely use of collection tools, especially the telephone.
- Consider introducing progress payments, deposits with orders and use of credit cards.
- Obtain inventory on better terms – for example consignment stock, extended credit terms, forward-dated invoices for seasonal purchases and discounts for prompt payments.
- Carefully assess the true benefits of 'deals'.
- Control the level of overtime worked, assess using part-time and casual staff rather than permanent staff and pay sales people on results.
- Evaluate the option of using sub-contractors instead of buying your own equipment.
- Rearrange annual payments such as insurance to times of less financial pressure, or pay smaller amounts more frequently.
- Ensure any short-term cash surpluses are invested.
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Extending credit to customers can help you gain more sales and revenue in the long-term, but it can become a significant cost to your business if you do not control that credit effectively. If you provide credit to customers they become your debtors and they who may pay slowly or not at all, leaving you to manage a revenue and cash-flow problem.
You need to be fully conversant with the tell-tale signs of a deteriorating customer account, including:
- accounts only partially paid each month
- late payments
- payments rounded off each month
- purchases beyond normal levels
- cheque not signed (delay tactic)
- mistakes with date or amount of cheque (delay tactic)
- development of attitude of indifference on part of customer.
There are some practical steps to controlling debtors.
- Create a credit policy that is appropriate and realistic for your industry.
- Screen potential credit customers by:
- using a credit application form
- obtaining and checking references
- always knowing exactly to whom credit is being extended - for example a partnership, sole trader, proprietary company, etc
- obtaining credit reports from a mercantile agency or bank
- conducting searches at the Australian Securities and Investment Commission (ASIC) Business Names Registry to confirm details provided
- setting a credit limit and periodically reviewing it.
- Conduct an aging analysis of debtors on a regular basis - it serves as a useful indicator of any deterioration in the quality of your debtors.
- Implement a fair but firm collection procedure - for example credit stickers on overdue accounts, collection letters, telephone calls, fax and email communications, legal action, etc.
- Ensure you are not overly exposed to a single major debtor.
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Holding inventory is costly. Costs include:
- interest on funds invested
- cost of warehousing and storage facilities
- staff costs
- insurance
- deterioration of stock
- stock losses.
Here are some actions for efficient inventory control:
- Focus through the application of the 80/20 rule - 20% of inventory is likely to generate 80% of sales and 80% of sales are likely to come from 20% of customers.
- Document all orders for inventory – this will help with the important question 'do I really need it?'
- Don't be afraid to say no – if you do not think an item will sell, don't buy it.
- Establish an adequate system for monitoring your level of inventory.
- Conduct stocktakes regularly.
- Determine the optimum level of inventory for your business.
- Establish re-order points for replenishing inventory items.
- Make adjustments for changes in customer demand when planning orders.
- Familiarise yourself with suppliers' delivery capabilities.
- Order in the most economic quantities.
- Take advantage of purchase discounts.
- Keep track of slow-moving stock.
- Spot potential fast-movers.
- Balance your inventory by price, line, colour, size and type.
- Select inventory with target customers in mind.
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How can you ensure tight internal control in your business? How can duties be allocated when there may be just one employee?
The answer is that you must step in as owner and become part of the office and an unofficial auditor. Tight internal controls minimise stealing and embezzlement, but depend on your playing an active part in their implementation.
Here are some actions to take for effective internal control.
- Open the mail and list mail receipts.
- Review the listing of mail receipts carried forward to the cash receipts journal.
- Personally sign all cheques.
- Personally approve all documentation in support of payments.
- Review the bank reconciliation – at random intervals, perform a bank reconciliation.
- Review notices to be sent out to tardy debtors.
- Personally approve all debt write-offs and discounts.
- Periodically test-check accounts payable statements.
- Personally approve and sign payroll cheques or bank documentation where a direct credit system is used.
- Become familiar with all fixed assets of your business.
- Periodically supervise a physical inventory check.
- Use the services of an external accountant to review your accounting records and systems.
Other controls
There are many other controls that you can put in place to help ensure your business standards and goals are met, including:
- monitor absenteeism
- monitor employee turnover
- monitor sales force performance
- new product development
- monitor plant safety
- employee productivity
- public relations
- monitor market share
- monitor product quality
- personally do all the hiring and firing
- require all employees to take periodic holidays.
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More information
On this siteYour business plan as a management toolCash-flow and budgetingGiving credit and how to control itWorkshops