We live in a world where just four in ten (41 per cent) businesses reach their fifth birthday, and it’s no secret that starting and running a successful small business is a huge challenge in today’s economy.
But 5.7 million businesses in the UK are doing just that, and my experience mentoring start-up founders has shown a pattern in the differences between those that succeed and those that don’t.
According to Xero’s most recent Benchmarking Report, more than 200,000 small businesses switched to a new accountant in 2017. For any small business, forming a strong relationship with a financial adviser has a huge impact on the longevity of the organisation. For those owners who collaborate with an accountant or bookkeeper, further analysis shows that 42 per cent of business owners whose businesses survive describe that relationship as ‘excellent’, compared to 27 per cent of those whose company failed.
My experience, mentoring start-up founders and helping to grow companies right around the world, mirrors these results. Good, clear accounting advice helps propel small business growth and small business owners who enlist the help of an accountant are far more likely to succeed.
I absolutely believe that accounting, finance and understanding the numbers is a discipline every business owner needs to get their head around if they want to do something special.
An accountant’s job is to provide clarity on what can seem like a deeply complicated world of business data and numbers, which when used to its full potential, can offer an entirely new perspective of your business’ health.
Language is important
Revenue, EBITDA, net profit, NPBT. The terms in accounting can be complicated and confusing for many small business owners. Good accounting advice starts with ensuring an understanding of language.
The biggest thing we, as accountants, can do with our small businesses owners is take a little bit of time when we start working with them to agree on the words we’re going to use, and then use those words consistently.
“A pound earned in revenue is quite different to a pound spent”
Cutting the jargon and educating small business owners on terminology, will help them see the value of the work you’re providing.
Not all pounds – or dollars – are equal
Accountants play a key role in helping small business owners understand that not all dollars are equal – some are already underweight.
If business owners are going to increase their spend, accountants can help them understand that: a pound earned in revenue is quite different to a pound spent.
Inherently, every pound earned has a cost associated with it. You’ve got to take off the cost before you start to spend the money.
Accountants can also help small business owners understand that not all customers are equal – some deliver lower revenue than others – and sometimes small businesses chase less profitable businesses.
Teaching small business owners where their profits come from and what income and expenses drive better financial performance can go a long way towards expanding the bottom line.
Cash is everything
While business owners look for the opportunity, advisers need to see that a company is solvent and that there’s cash on the books at the end of the day.
Accountants can help small businesses understand if they’re in negative or positive cash cycle. Negative cash cycle businesses are more fragile, however an advisor can help shift the operation from one model to the other.
Helping manage cash flow is one of the most important tasks an accountant performs for a small business. Unexpected cash crunches or events can throw even the most stable of businesses. Incomings and outgoings can vary throughout the year. Indeed, according to statistics from Xero’s Small Business Insights cash flow is at its highest in December, with January at the lowest.
Plan for all reasonable outcomes – and some of the unreasonable ones
Budgeting and forecasting can really help a small business understand what they need to do to get ahead.
We need to help our business owners plan, not just for the reasonable outcomes, but for some of the unreasonable ones too.
We need granularity in the spreadsheets but we don’t need so much that we swamp our small business owners.
If you can get your small business owners to play around with the assumption boxes, show them if they play with the margins, the revenue, they start to see the power of the numbers, they see just how big and profitable their company can be.
Keep out of trouble
At the end of the day, compliance is key in accounting. Advisers help prepare statutory accounts, tax returns and shareholder information. It’s our job to keep small business owners out of trouble.
Dale Murray CBE is a non-executive director at Xero.