2018-06-14 04:00:07 Business Growth English Learn about the critical tools you can use to set up you small business for financial success. Read more about why a business plan can help... https://quickbooks.intuit.com/r/us_qrc/uploads/2018/06/How-to-Set-Your-Small-Business-Up-For-Financial-Success_featured.jpg https://quickbooks.intuit.com/r/business-growth/how-to-set-your-small-business-up-for-financial-success/ How to Set Your Small Business Up For Financial Success

How to Set Your Small Business Up For Financial Success

7 min read

Many business owners start a company and have some initial success. The product or service they create has a market and they generate an increasing level of sales for the first year or two.

But then, the business reaches a plateau. The owner spends all of his or her time operating the company and serving the existing customer base. There’s no time to try a new marketing idea or to target a new customer segment. Owners start to feel overwhelmed and frustrated, because all the effort doesn’t produce an increase in sales and profits.

You don’t have to settle for the same results this year.

With some thought and smart planning, you can set up your business for more financial success. Consider these strategies to get your organization on track.

1. Understand what you don’t know

The first step is to take a hard look at what you know, and what you don’t know. To illustrate, assume that Mary Ann owns and operates Sunrise Boutiques, a group of four clothing stores for women.

Mary Ann has achieved some success by identifying clothes that women prefer, and marketing her items effectively. But as an owner, she realizes that her business is treading water. She’s spending all of her time on inventory purchasing, payroll, accounting, and personnel issues, and her monthly sales have stalled.

Mary Ann sees other retailers that are able to grow by adding product lines and opening new locations. She doesn’t have a system that allows her to work productively, so she can free up time to grow the business.

2. Document your operations and expenses

One tool that Mary Ann can create to operate more efficiently is a written procedures manual. Every business has routine operations that are performed every week or month, and those tasks should be written down in detail.

Now, most business owners know intuitively what must be done to operate the business. For example, Mary Ann knows that exact steps that must be done before a store manager can open a location boutique for customers each day. While she understands her business, she hasn’t communicated that knowledge to her staff in writing.

The processes for opening a boutique, ordering inventory, and operating the point-of-sale system must be documented. A written procedure is effective when it includes the employee responsible for performing the task, and how often the task is completed.

Mary Ann will see a big payoff when the procedures manual is created. Everyone in her business will know how each task should be performed, who is responsible for the task, and how often the task should be completed. The manual makes it much easier to train employees, and using the document eliminates confusion among the staff.

3. Work backwards from sales and profit goals

To achieve more success, Mary Ann should think about her sales and profit goals, and then work backward to achieve the goals. Assume, for example, that Mary Ann wants to increase annual sales at the Riverside store location from $500,000 to $600,000 at year. What’s required to make that happen?

Consider these issues:

      • If the average customer sale is $100, Riverside will need 1,000 more sales to reach $600,000 in total store sales.
      • Mary Ann will have to buy at least $100,000 more in inventory, and she’ll have to generate more cash to pay for the inventory.
      • The Riverside employees will have to process 1,000 more sales in the store. If the store is open 200 days a year, the store’s sales will increase by five each day.

Using the new sales goal is a starting point; Mary Ann can add more detail to create a complete business plan.

4. Decide if it’s worth the time to create a business plan

Writing a complete business plan may require dozens of hours, and input from many people who are involved in your business. If you spend the time to create a business plan, however, there’s a big return on your time investment. Creating a business plan forces you to think carefully about the exact steps needed to generate better company results.

You can operate as you do now- and produce similar results- or you can get more serious about your business and write a formal plan. Creating a business plan moves into you into “business adulthood”. The process is well worth your time.

5. Identify the key growth triggers in your growth plan

Say, for example, that Mary Ann decides to write business plan for the Riverside store, assuming $600,000 in annual sales. Her initial thoughts are that she needs 1,000 more sales at $100 per sale to reach her goal. As she digs deeper into the formal plan, there are some key factors Mary Ann should evaluate:

  • Pricing and profit margins: While increasing sales is important, it’s also essential for Riverside to generate a reasonable amount of profit per dollar of sales. Profit margin is defined as net income divided by sales, and Mary Ann should review each product’s price and profit margin. By increasing some prices, or promoting items that are more profitable, she may be able to generate her desired store profit at a lower level of annual sales.
  • Cash flow: The $100,000 increase in sales is a 20% increase from the prior year. Increasing sales will require Mary Ann to spend more on inventory, marketing, and labor hours. These costs will require more cash. To plan for her cash needs, Mary Ann should create a spreadsheet that lists the store’s beginning cash balance, customer payments, inventory purchases, and other cash inflows and outflows. If her forecast has a cash shortfall in a particular month, she should obtain a line of credit to cover her cash needs.
  • Tax planning: Some business owners don’t consider tax planning, because taxes are paid at the end of a particular month or year. Find an accountant to help you with this portion of your plan. If Riverside’s sales and profits are higher, Sunrise Boutique will have a larger tax liability at the end of the year. In addition, the company will withhold and pay more in federal and state payroll taxes as labor hours increase. An accountant can help you forecast your tax liabilities and the amount of cash you’ll need to pay.

As you can see, many components of the business plan are connected. For example, increasing sales and profits generates a higher tax liability. Writing a formal business plan is time consuming, because so many factors are connected.

6. Fix what is broken in your current business model

The final step to achieve better results is to fix those business processes that simply don’t work efficiently. A procedures manual documents what you do, but you may need to go farther by improving a process that isn’t efficient.

Assume, for example, that employees at the Riverside store report their hours worked to the store manager, who then records the hours on a spreadsheet. Mary Ann uses the spreadsheet to report hours worked to her payroll company. The process is documented in the procedures manual.

As Sunrise Boutiques adds more workers, the spreadsheet becomes more complicated, and more errors occur. To make the process more efficient, Mary Ann purchases software that allows each worker to record hours using their mobile device, and the data is transmitted to Mary Ann and the payroll company.

Every business has processes that can be improved, and operating more efficiently can improve results. As Sunrise Boutiques generate more profits, Mary Ann should keep some profits in the business, so that she can invest in assets that make the business more productive.

7. Minimize your business’s growing pains

No business can expand without experiencing some growing pains. You may hire an employee who isn’t a fit, or invest in software that doesn’t meet your needs. You can minimize frustration by creating a procedures manual, writing a business plan, and by fixing systems that are inefficient. Use these tips to set up your business for financial success.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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