Much of my time is spent reviewing client’s accounts at the most fundamental level – where did the money come from and where did it go.
Sounds like a pretty simple task but surprisingly, many small business owners have a macro perspective of cash flow, even though cash flow is the lifeblood of any business.
The key to success in this unprecedented business economy isn’t to assume the macro view. Today, micro-allocation will prove to be the life preserver for many small businesses in the coming months.
Macro-Allocation?
Since the dot.bomb debacle that began in January 2001, we’ve seen both ups in downs in market and business activity. Many more ups than downs. Small businesses have been soaring on thermals created by hot markets and easy credit.
So why rock the boat? A macro-view of business expenses served us all well for many years – until the later half of 2008 when the bottom fell out, the credit bubble burst and some businesses found themselves with 12 months inventory instead of the preferred three to four months.
Within virtually every business sector, credit is tight though the cost of borrowing is the lowest it’s been in over 50 years. In Australia we are probably headed for 3% interest rates and in the U.S. the rate is headed for less than 1%. The problem is lenders are squeezing cash. They aren’t lending readily, making small business growth difficult if not impossible.
Credit is the seed money that enables small businesses to grow larger. But, if that credit supply is tightened and the small business owner is unable to borrow to hire new employees, the spiralling economy will soon become a maelstrom, sucking in small businesses that don’t adapt to this new environment.
To understand micro-allocation, it’s important to review macro-allocation.
Macroeconomics in business breaks down income and outgoings into broad categories within the company budget such as Salaries, Marketing, Rent, Insurance and other major categories. Each line in the company budget is weighed in macro-economic terms.
Micro-Allocation: Small Business’ Life Raft
Micro-allocation employs a more practical, microscopic approach.
The objective is simple: which expenses deliver the greatest “bang for their buck” (return on investment) or in simple terms, which costs have the greatest, positive impact on success.
Impact. That’s what you’re looking for. The process is simple. Accounting prepares a line item budget with expenses broken out dollar by dollar. Comb through all of these micro-allocations and assign an “impact value” to each item in the budget.
Sure, subjectivity enters the picture to some extent but as the owner or accountant you have a pretty good idea of company cash flow and what goes where.
You might make some interesting discoveries, which, in turn, lead to innovative, cost-cutting steps that lower operating costs while boosting productivity.
For example: Employees waste time driving to and from the office. Solution? Virtual office software that enables employees to telecommute. Morale soars when employees can avoid the moving carpark called peak hour.
Consider each item and its impact on business growth.
Eliminate low-impact items by outsourcing at a much lower cost and on an as-needed basis. Use software solutions to increase productivity. Streamline in-place procedures and simplify the business-client cycle from lead generation software to call capture software that messages you even when you’re away from the office.
The point of micro-allocation is to focus the stakeholders’ attention on the small stuff – the stuff we’re not supposed to sweat. Well, in an economy like the current one micro-allocation will not only enable your business to survive it will help you thrive.
