PICTURE the scenario. You are in the bank to ask your business manager for an increase to the company overdraft or a loan to expand the business. You know the current economic climate is poor and there's a chance he might say no, but Gordon Brown and Alistair Darling have both promised to ensure that banks support small businesses, so you're feeling quietly confident.
All is going well until the manager starts asking questions about the financial stability of the business and your ability to repay the credit.
"So, your turnover sounds good. What are your costs like?"
"Our costs are well under control, and w
e're confident we can meet the repayments," you reply with a well-rehearsed answer backed up with a positive smile.
"Good. So give me a bit more detail. What are your actual costs?" he asks.
Crestfallen look: "Er, well, actually, I don't know," you admit.
"Goodbye," he says.
The vast majority of small business owners in Scotland don't have a clue what it costs to run their business on a daily basis. And what's even worse, almost half have failed to bill a customer for completed work.
Battling the downturn in business is becoming increasingly hard, but when SMEs fail to pay attention to the most basic, fundamental business practises, it's little wonder that the number of company failures is increasing week by week (latest statistics show that liquidations have more than doubled in Scotland from 156 for the second quarter of 2007 to 356 for the same period ending September this year).
A recent survey carried out by a Lanarkshire-based business solutions company found that most of Scotland's small firms are leaving themselves exposed to bad debt and the threat of failure because they are just not implementing simple, effective process-control procedures.
Some 76% of respondents to the survey admitted they do not know how much it costs to run their business, and a further 44% confessed that in the past they had not invoiced a client for work. Two-thirds of all businesses surveyed had no established electronic process or system to help manage their business, relying instead on desk diaries, whiteboards, paper and the collective memories of their staff.
I genuinely believed it was common knowledge, indeed common sense, that you can't run a business without up-to-date, accurate financial data. Yet it appears that, despite the current economic constraints, there are still many businesses out there doing just that.
It was astonishing to discover that almost three-quarters of all businesses surveyed couldn't perform the most simple of business tasks, and as a result could not be sure whether work had been correctly invoiced, or whether a project was actually making or losing money.
Squeezing every last penny of profit from the sale of a product or service is not miserly but essential, even when there isn't a recession. But it's worryingly clear that there's a widespread lack of focus on accurate costing, the calculation of margins and the fair allocation of overheads.
Margin is not just about pricing a job for hours, materials, a guesstimate on overhead contribution and a mark-up for profit. Businesses need to know exactly how much to charge for overheads, taking into account all the hidden costs – particularly those office-based ones – that tend to be forgotten or left out altogether because they are too difficult to calculate.
Did you know that simple things, such as document mismanagement, cost 40%-60% of office workers' time, which adds up to 20%-45% of labour costs and ultimately 12%-15% of revenue? Why would you work for a difficult client when the other nine pay on time and offer higher margins?
Diamond drilling firm Clyde Valley Drilling (CVD) recently developed a clever piece of software aimed at streamlining the business processes of their organisation. Software development was obviously not their primary skill, but directors Owen Barrett and Craig Robertson recognised the need to have finger-on-the-pulse knowledge of the costs associated with running and expanding the company.
Their efforts saved £200,000 in the first year of the new system's operation through direct cost savings, improved invoicing and cash flow, increased job efficiency and administrative time savings.
CVD has now spun out Quarterback as a second business to develop and market its software iQ.
The survey I mentioned earlier was carried out to demonstrate the need for strong and efficient resource management in SMEs.
According to Scottish Chambers of Commerce, the survey underlines the need for businesses to ensure that all accounting and audit processes are enforced rigorously in order to keep on top of invoices and purchase orders.
Now, we won't all have the entrepreneurial vision or the drive to develop our own software and turn it into an award-winning business in less than two years. But we do all have the ability – indeed it is our fiduciary duty – to understand what it costs to run our business and to take decisions accordingly.
Just listen to Kwik Fit founder and multi-millionaire Sir Tom Farmer, who said: "The more efficient business you have, the easier it is to run that business, and win."
Need I say more?
The full article contains 875 words and appears in Scotland On Sunday newspaper.
