Being proactive is the key to running a financially healthy business. At Beyond, we think about this always-on, real-time approach in terms of cycles. This means having the discipline to perform key financial tasks at the appropriate intervals, moving forward with data-based decisions rather than sitting back and waiting for your financial year to be long past before you know how you performed.
In practice, there are four cycles, and I cover them in depth in the blog How To Manage Your Business More Proactively. They break down as follows:
- The weekly cycle – bookkeeping: things like reconciling bank transactions, sending invoices, credit control, posting bills, and supplier reconciliation.
- The monthly cycle – management accounting: things like preparing management accounts and management reporting, checking the bookkeeping, payroll, and VAT.
- The quarterly cycle – financial strategy: things like financial planning, measuring key drivers and performance indicators, and implementing strategic projects.
- The yearly cycle – accounting compliance: things like annual accounts, corporation tax filing, and income tax returns (Form 11s) for directors.
As Q3 draws to a close, it’s the perfect time to take stock of your progress so far and, if necessary, make a few changes so that you end the year stronger. Q4 is when we start to plan the following year and we need to know exactly where we are if we’re going to be able to realistically plan where we want to get to.
Review your budget versus actual figures
You should have monthly budgets set up for each account category (for example, cleaning, entertainment, insurance, etc., depending on how your accounts are set up). If you use Xero, this is very easy to set up – just go to your All Reports dashboard and look for Budget Manager. I give detailed guidance about budgeting – including good tools for more complex businesses – in my blog Why You Should Create A Monthly Budget For Your Business.
How does your actual performance so far this year compare to what you budgeted? Where are you ahead, and where are you behind? If a particular expense category is running hot, a temporary spending cap now can get you back on budget by the end of the year. Staff training is a good example – it’s rarely the end of the world to stop spending there for twelve weeks. The category isn’t gone forever; it’s just on pause.
If you decide to adjust spending, the key to achieving it successfully is communication. Tell the team why you’re reining in and what the strategy is. I’m not saying you should open up your accounts to everyone, but I do believe that making people aware of the targets and numbers they personally influence (their revenue streams and their expenses) helps them see the big picture and understand what you’re trying to achieve.
Keep up the momentum on your improvement projects
If you’ve been working proactively on your business, you would have set up a RIP last quarter that you can now check on. Rapid Improvement Projects (RIPs) address a particular priority that can be acted upon within three months and will bring real benefit to the company. You choose these projects based on the constraint that’s most holding the business back or the single lever most likely to move a KPI before the next quarter and commit to action on that one thing.
Most improvement efforts fail not from lack of ideas but from too many running at once. Constraining it to a single quarter and a single priority creates a natural deadline and point of accountability. There’s also a compounding effect over multiple quarters. A single RIP rarely transforms a business, but four or five in sequence can shift a business substantially, because each one builds on ground already gained rather than starting cold each time.
This is a pivotal point in the year when you can judge whether your last RIP was a success AND choose the one thing worth committing the final quarter to. Having thoroughly reviewed your budget, consider what will most help you move this year’s numbers. If your turnover is above €1.5 million, you should have a senior financial person reviewing these figures and helping you make the decision – a fractional CFO service is ideal for this.
Decide now on next year’s wage and price increases
The end of September is also the natural point to start thinking about next year’s wages and pricing.
Some business owners worry that sharing good news will only fuel demands for higher wages. In practice, the opposite tends to happen. Being open about financial success makes for a more honest conversation about wages, because everyone understands what the company needs to deliver in order to afford them. If wages are going to go up, what is the company expecting in return – for example, increased productivity or certain results?
On pricing, my advice is simple in principle and hard in practice: regular small price increases beat rare large ones. If you adopt a practice of small yearly raises (say, 1% to 2%), it’s barely noticed. If you leave it for four or five years and suddenly need to apply a 5% to 10% jump, you can expect a fair amount of pushback. That’s because the sudden change looks arbitrary rather than routine. If you are planning a January price increase, letting clients know by the end of Q3 gives them time to prepare and makes the change feel considered.
If you haven’t already, it’s worth reading How To Set Your Rates Or Pricing In A Service Business, which goes into how to calculate what you need to charge and how to communicate a price rise so it doesn’t cost you clients.
Get ahead of preliminary tax
By the end of Q3, you have actual profit figures for three-quarters of the year. That’s enough to make a genuinely informed estimate of your preliminary tax bill, which is due in November. Don’t forget, if profit is increasing year on year, you can often pay preliminary tax based on last year’s figure. If profit is decreasing, you’re better off basing your payment on an estimate of the current year. Either way, doing this calculation now means the number can be built into your cash flow properly instead of landing as a surprise.
Put any surplus cash to work
Clients of ours that have adopted the cycles approach and worked proactively on the business have been able to transform their results within two or three years to the point they end up with a lot of surplus cash. Businesses should always have a liquid reserve, but simply allowing cash to build up in your current account isn’t doing much for the business. This is a good moment to decide what it should be doing instead.
If the year has gone well and your business is holding more cash than it needs to, you might consider putting a lump sum into an executive pension scheme for the director(s). As well as getting that money working towards retirement rather than sitting idle, a company contribution like this reduces the company’s profit for the year, and with it, its corporation tax liability. If your company doesn’t have a scheme for key personnel, it’s a good idea to discuss this with your accountant now so there’s time to act before the end of the year.
More broadly, if you’re sitting on cash that you don’t have an immediate use for, it’s worth knowing what your other options are, because traditional banks offer paltry interest rates on business deposits. We cover this in the blog Surplus Cash On The Balance Sheet? Don’t Expect A Return From Your Irish Bank.
Check in on the compliance tasks it’s easy to forget
As well as dealing with the big strategic questions, the end of Q3 is a good moment to make sure you have kept up with your various compliance obligations too, so do a quick check of all the returns, filings, and deadlines that might have slipped while your attention was elsewhere.
Three months left to take action
If the only time you look at the health of your business is at year-end, you haven’t just lost the chance to shape the business – you missed the opportunity to learn what could have fixed it. Having a review at the end of September avoids that trap because there’s still a full quarter left to act on whatever you find – an expense category to pull back on, a price change to communicate, a pension contribution to make, a project to run.
The business that drifts into the following year before finding out what happened isn’t going to be able to sustain growth or position itself for a sale. If you are targeting growth, reviews allow you to look honestly at the gap between plan and reality, then make some deliberate changes. If you don’t currently have anyone doing this for you on a quarterly basis, an outsourced or fractional CFO can be a straightforward way to introduce that accountability (read more about how our CFO service works).
Thinking about outsourcing your accountancy function? At Beyond, we don’t just crunch the numbers! We offer impartial business advice and build long-lasting relationships with our clients. Get in touch to find out how we can help!
Rory
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