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Finance for SME: Management, the power of data and advice on running your company

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Finance for SME: Management, the power of data and advice on running your company
Finance for SME: Use your data to power up your business.
CRN Channel Academy

Got a stack of business data and not sure what to do with it to manage your finances and grow your business? If you’re running a small or medium enterprise (SME), it can be tough to get a good read on your financial health and make confident decisions about what to do next. The COVID-19 pandemic added to our problems with many businesses experiencing a sharp drop in income. 

We can’t predict these events, but you can use your data to understand and better manage your sales, accounts, inventory, customer demand and more. Analysing your data to gain insight into your business’s financial position has tangible benefits. It’s also critical for your success in the long run. Which data has the most power in helping you manage your SME finances and recover? Read on to get the low-down on the strength of your data.

What data is important?

Before you can start unleashing the power of your data, you’ll need to start by working out which KPIs (key performance indicators) are most useful in measuring how your SME's finances are tracking. Think about what your financial goals are and what information you need to move the business in the right direction. How will you measure your goals, and when do you want to achieve them?

Data that you can measure and can help you work towards your strategic goals are key. This will be different depending on your business. From watching your cash flow to make sure you can pay your bills, to getting a true picture of your Profit and Loss, to making smart decisions on sales and product development to monitoring website traffic, lead conversions and sales to monitoring inventory levels, cash flow forecasting. All this information can help you plan, keep your finances healthy and make good decisions for your business. 

For example, if your revenue is less than last year, you might want to track your sales growth, and set a goal for increasing your income to earn more profit. Your data will help you each step of the way and show you what to focus on to achieve your goal, such as improving customer service or hiring more sales staff.

Here’s a list of measurable data to get you started.

Appreciate how margins and sales connect

Your gross profit margin shows you what percentage of your revenue is profit, after deducting expenses like production costs, sales and other direct expenses. It’s important to be able to get an up to date, real-time view of your profit margin. It’ll help you can make sure it’s enough to cover your operating expenses while leaving you enough to invest back into the business on marketing and other growth activities.

Gross profit margins do vary by industry. Find out what’s typical for your SME—engineering companies, for example, have 12.15% on average—and that’ll give you a clear KPI to work towards.

One of the key concepts regarding your gross profit margin is that it should stay relatively constant regardless of how much you sell. In contrast, your net profit margin fluctuates, when sales increase, net profit margins go up.

In real life, gross profit margins often vary from one transaction to the next (Furniture outlets make a higher margin on leather couches than they do on dining tables, for example). For this reason, being able to calculate your average gross profit margin over a period of time is worthwhile.

Here’s how some different kinds of businesses go about calculating their gross profit.

  • A seafood distributor who buys seafood on wholesale and resells them to retailers can see that they sold $2500 during the month and spent $1300 on purchasing wholesale price seafood, labelling and freight. Their gross profit for the month is $1200 and their average gross profit margin is at 48%.
  • A landscaper designs and constructs a playground for a school that sells for $250,000. He spends $180,000 on materials and labour to build. His gross profit on the job is $70,000 and his gross profit margin is 28%.

Net profit margin is the cash you have left after paying all your direct and indirect expenses. It shows you what percentage of your revenue was profit. While no target number confirms your SME is healthy, you should aim to have a net profit instead of a net loss. 

Based on the landscaper’s example above, his gross profit margin will remain the same at 28%. However, his net profit and net profit margin increases with extra projects if his expenses do not exceed his income. For an example, see the below table.  

 

1 project

5 projects

Sale $250,000

 $    250,000.00

 $        1,250,000.00

Labour and Materials $180,000

 $    180,000.00

 $           900,000.00

Gross Profit

 $      70,000.00

 $           350,000.00

Less expenses (advertising, insurance, motor vehicle)

 $      10,000.00

 $          10,000.00

Net Profit

 $      60,000.00

 $           340,000.00

 

 

 

Gross Profit Margin

28%

28%

Net Profit Margin

24%

27%

We can see that; the landscaper’s net profit and net profit margin has increased with extra projects.

This measure can help you set a goal for business profitability. If it’s low, having visibility will help you make decisions about cutting non-essential costs and will give you a clear KPI to work towards.

And what more, if you buy or manufacture items that you sell, each item has a separate gross profit margin. If you have an accounting software and you use this software to track your inventory, you’ll be able to generate reports that calculate gross profit margins and net profit margins for you. Furthermore, it’s the trends and changes in gross profit margins that provide insight.

Maintain a healthy cash flow

Even if your SME is making a profit, it’s still cash flow that gives you an accurate read of your financial health. Without enough money in the bank, you could go out of business faster than you think. A detailed cash flow forecast will tell you if you have enough money to pay your suppliers, bills and staff, and for deliveries and other operating expenses. It’ll confirm if you’re making enough cash to support your investments. 

The ability to track your cash flow in real-time will help you see which months are your leanest and which are healthiest, plus those affected by seasonality. That allows you to plan discounts and offers and reach out to high valued customers so you can focus on growing your business.

For example, the above seafood distributor has produced a 6-month cash flow report and they have noted that they will have a tight month in April due to big supplier payments, but things would brighten up by the end of June. Given this prediction, the seafood distributor may want to reach out to high valued customers to increase upfront payments, perhaps even offer discounts to retailers who may buy more stock to counteract their supplier payments.

Cash flow projections often require several worksheets that interconnect with one another. With a cloud business management solution, you may want to compute a cash flow projection with sales budgets, or a cashflow projection forecasting when suppliers are going to get paid and to predict stock levels.

Aged accounts receivable

An aged accounts receivable report is essential for any SME that sends invoices to customers. It’s a list of unpaid bills—money owed to your company from a specified date. Seeing who owes you money, how much, and by how long they’re overdue can help you manage your cash flow more efficiently and prevent problems before they get too big to deal with. 

Related - Finance terms 101: what every channel IT professional needs to know
Related - How to crush the cash flow crunch and set your business up for growth in 2021

It’s easy to be complacent about your receivables. But a customer who consistently pays late could be the main source of your cash flow woes. Having access to this data will help you predict payment dates, chase up on payments or apply interest to customer accounts. You could also offer incentives or discounts for prompt payment to bring in cash on time.

Aged accounts payable

Aged accounts payable is the money you owe your suppliers. If the report shows that you’re taking too long to pay your bills, it could show you have a cash flow problem. It’s important to keep your suppliers happy as well as your customers, so this data can prompt you to act and keep your supplier relationships strong. You don’t want to miss out on vendor discounts for on-time payments. There might be an option to work out a payment plan if necessary and stay in your supplier’s good books. 

Keep control of your inventory

A lot of money is wasted on poor inventory management. Getting visibility of your inventory levels so you can keep them just right will help you keep your cash flow healthy. You can start by spotting trends in customer demand and ordering the right quantity. Change your ordering to avoid supply chain issues or wasted inventory. Try to shift old stock that you can’t move and consider reserving stock for important customers. 

Make sure you understand your supply chain end to end. Then you can plan for contingencies for when issues arise. Can you switch to a local supplier or increase your supplier base to meet demand? Can you access extra stock? 

Good SME inventory management not only helps you with your cash flow. It’ll also help you keep your customers happy by having what they need when they need it or offering a substitute if there are delays.

With access to accurate, useful data, you can make inventory decisions based on fact, not your gut feel. 

Understand your customers

Your cash flow also depends on how well you know your customers and how profitable your product is. Take a close look at the cost of your products-which are making you a profit, and which aren’t? Are production costs increasing? Also, look at your customer transactions. What are they buying? What’s your customer churn?

Use your sales data to refine your product line or even discontinue items that aren’t moving. Focus on customers who are profitable and use the information on trends and opportunities to offer your customers what they need. A timely promotion or a special offer could be just the thing to lift your sales and contribute to a healthy profit.

Finance for SME: Ditch the spreadsheets

Spreadsheets might have worked in the past, but for many businesses, manual data entry and multiple spreadsheets don’t cut it anymore. They don’t give you the flexibility, access or ability to analyse the data sufficiently. Instead, get the right tech to help you. A good tool will help you show your data creatively, in real-time, in an easy-to-read format. It will allow the right people access to the information when they need it, wherever they need it. With many people working from home, cloud-based software that gives access to your data on the go from anywhere is ideal. 

With good SME data at your fingertips, you can turn your data into actions, forecast and plan accurately, control your finances and be in a position to grow. Now is the time to lift the lid on your business data. From warehouse distributors and supply chain managers to not for profits, your data is vital to increasing productivity and staying in business. 

Use your data to power up your business

Data isn’t just for big businesses. Reporting on your data quickly and accurately is critical for all growing businesses. You can’t fix what you can’t measure. Set your KPIs according to what’s right for your industry. Make sure you have a business system in place that can give you access to up to date, real-time data on your cash flow, profit and loss, sales, inventory, accounts receivable and payable and other metrics. With your data in hand, you’re in the best position to make confident, informed financial decisions for your business to give it the best chance to succeed.

 Syamala Murigiah, CPA is Partner Success Manager at Wiise.

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