Almost every business has opportunities to increase their ROI by acting on what should be relatively easy to access information. Unfortunately because of other commitments, pulling together the needed information is not something that small businesses consistently do and as a result forever lose money making opportunities.
What is ROI?
ROI or Return On Investment is the business’s return to you on your investment and while there are many ways to increase ROI, how you manage your business’s finances will always restrict your ability to increase your return to some degree. ROI should always be positive and is driven by a number of different factors including revenue, expenses, assets owned, and the mix of cash invested vs. cash borrowed.
Knowing How to Increase ROI
Small and growing businesses have a great opportunity to increase their ROI. They can do this in a number of ways, some of which are very easy once you know what the opportunities are. The problem for many businesses though is in finding out where these opportunities lie. To find these opportunities a business needs visibility into how it is doing financially and what drives its success. Many businesses haven’t taken the steps needed to find these things out. So how can a business know what things it needs to do to find out where it greatest opportunities lie?
The Hierarchy of Business Financial Management Needs
Based on Maslow’s Hierarchy of Needs, The Hierarchy of Business Financial Management Needs defines the needs that businesses have for their financial management. Since it’s a hierarchy, the first unmet need will be what limits the business’s ability to manage their financial performance. It is the need which is also limiting your ROI improvement.
From the day it commences operations, a business has a need to conduct financial transactions. Transacting is like breathing to a business, it is how it performs the most basic activities. Transacting is also where many small businesses stop paying attention to their finances. They manage using checkbook accounting and a shoe box of receipts, never really knowing where their money goes or if they are really profitable.
Basic record keeping begins with accounting software. Without record keeping businesses will find it nearly impossible to know where the money is going and where it is coming from with any certainty. This often results in bank overdrafts, tax penalties and in some cases fraud. Once a business owner has the ability to keep records they have achieved a basic level of security.
A word of caution, accounting software has changed significantly over the past 5 years and has become integrated with more operational inputs than ever before. A poor implementation or a failure to keep the information updated is in many instances worse than not having any record keeping at all.
If the business doesn’t have the resources or knowledge to keep accurate books they should retain the help of a tech savvy bookkeeper. Basic bookkeeping can start at less than $10 a day which is certainly well worth the cost.
If a business owner can keep records they can next focus on having accurate record keeping that can be turned into informative reports which are delivered on a timely basis. Reports will not only reflect the activity of the business but will do so in a way that matches periodic activity to periodic outcome so that the business can understand how successful it is. Reports also aid in the deeper analysis of activity to help unravel any results that don’t make sense at first glance. Recently, I worked with a home services business to create a custom report that gave the business the opportunity to better manage their routes thereby reducing overtime and increase their profit by over $2,000 per month.
With trusted reporting a business has reached an important milestone, it is able to accurately understand past performance but the past is just that and it alone cannot help the business prepare for future events. Financial planning includes income and cash flow modeling for both forecasts and budgets, tax planning, and planning for future resource requirements. One of my first clients was growing so rapidly that having a forecast helped them realize that their working capital needs were going to leave them short on payroll. Planning gave them the opportunity to secure financing before it was needed and therefore at a lower cost.
Rapidly changing businesses or businesses that would like to increase the rate at which they are growing have a very high level need to ask “what if?” and understand what the financial impact would be. It is at this level that they need a financial strategic partner. A new business idea or even a change to the existing business can be modeled to help the business make an educated decision before making any financial commitments. Plain and simple, if a business doesn’t know if an investment is going to return positive results, it shouldn’t be making that investment. If you can have a partner to think strategically with, you can thrive.
5 Tips to Address Your Business’s Financial Management Needs
- Identify and address your current restricting need to move up the hierarchy. With each move up, your ROI will improve.
- If you are not meeting any of your needs beyond transacting, you will always be vulnerable. Get a tech savvy and trusted bookkeeper at the very least.
- If you are recording transactions but aren’t getting the information to understand how effective you are, better financial reporting and financial analysis is what you need. If you don’t know how to do this or don’t have the time, get help.
- If you have good reports and the accompanying analysis but don’t have the financial projections that will help you plan your cash, taxes requirements, building a good 3 statement forecast and updating the assumptions regularly will make a world of difference both mentally and financially. Our SMART Plan is a great start without any ongoing commitment.
- Finally if you have all of this you can start thinking more strategically about business growth and long term plans. Make sure that you have a trusted financial partner that meets your needs and budget.
The Shared Finance Center provides outsourced accounting, bookkeeping and fractional CFO support to small business owners and in doing so we heavily focus on maximizing cash flow. We are headquartered in Roswell, Georgia and work with clients across the United States. If you think that this post would be helpful to anyone you know, please pass it along. Also please follow our blog for regular tips to grow your business.