Finance for Small and Micro Businesses

Posted: 11th May 2015

EllisClarkAssociates is not a “finance business” nor is it a “financial consultancy, it is a training and communications company. I have worked as sole-trader or owner-manager most of my working life and my business partner Michael Clark, worked in investment Banking for over 20 years, so, as a business we do understand finance and working for ourselves, and we find this is a core value in our mentoring of our micro-business clients. In the past year or so EllisClarkAssociates has delivered half a dozen or so workshops for WiRE members, on topics ranging from Small Business Vision and Strategy to Psychology of the Buyer and Setting Your Price. In all of these sessions we come to some discussion of Finance/Profit/Cost Control. The reason for this is simple. In business, money is how we keep score!

Whenever we get to discussion of financial issues in these sessions, however, there is a very obvious sense of unease, discomfort and reluctance among WiRE members. Actually this is not a syndrome unique to WiRE members. Many small business owners/sole traders feel they are good at “what they do” and that the whole numbers/finance thing is outside their core skill-base. Some small business owners are reluctant to understand the numbers in their business because they are scared of what they will find. Some don’t want to dig into the numbers because they had non-financial motivations for establishing their business. Quality of life, serving the community, spending time with family, doing something they love. We agree with all those reasons for being in business, totally, we share some of those values ourselves. None of which changes the need for a business to be financially sustainable. There is no way you can make YOUR business financially sustainable if you don’t understand the numbers in your business. The good news is that doing so

is NOT rocket science. It’s not even accountancy. It’s all common sense and it requires a calculator or a spreadsheet and numeracy less than that required for GCSE maths!

We run a workshop called “Understanding the Numbers in Your Business”. At the risk of revealing all our commercial secrets we will reveal the basis of this workshop!

Checklist for sustainable business:

1.     Understand your personal overhead.

a. We recommend use of three-six months of personal bank statements.
b. Use the real numbers in those statements to understand what your lifestyle costs
c. Define your PERSONAL overhead
d. Include mortgage, food, utilities etc
e. You can chose to do this on a “bare minimum basis” or a “reasonable life basis”
f. Take the MONTHLY NUMBER forward

2.     Understand your business overhead

a. Again we recommend use of actual bank statements so nothing is forgotten.
b. Use real numbers to understand what your business always spends.
c. Define the business overhead from these real numbers
d. Include rent rates utilities stationery etc
e. We recommend including all your permanent staff too. Your accountant will tell you that permanent staff engaged in production are not overhead they are marginal cost of production. But for small business financial management that really doesn’t matter. See the note at the end.
f. Add your personal overhead as your own “minimum wage”. You may take the money as directors loan/dividend in accounting terms, but that number is the minimum your business needs to provide for you to live, so it’s an important part of the business overhead
g. Take the monthly total.

3.     Convert to an annual total

These monthly and annual numbers are the MINIMUM requirement of your business to produce profit (NOT SALES).

In our experience only a tiny fraction of small businesses actually understand and know these numbers, for whatever reason. We do not think you can make sensible management decisions about sales, about employing staff, about investing  in marketing/advertising unless these numbers are imbedded in your brain.

A brief note about why we include production staff in overhead. First we do accept we use the term “overhead” incorrectly! But this is just a word to reflect money that leaves your business every month come what may. Technically the cost of production staff, according to your accountant is part of the “cost of sales”. True. But the reality is that if you have two full-time staff working on making things, and you have no actual orders, and they are not producing anything, you will be paying them anyway! Every month! For this reason we feel it helps small business owners to treat permanent staff as part of monthly financial commitments and not as cost of sales.

We don’t have space here to look at the next aspect of small business finance – the sales/cost-of-sales/profit side.

At this stage, however you have a clear idea of how much it costs you to both run your business month in and month out AND to pay yourself enough to live. This number is so important. These costs MUST be covered by your profit on sales. It is the basis for your REAL business plan (Not the one you did for the bank 2 years ago and promptly put in a drawer and forgot!). If profit from selling your goods/services does not equal this number, your business will generate a trading loss. If it exceeds this number you will make a trading profit. It really is that simple!