Business owner, minimize your financial difficulties and remember these six tips!

Calculating cash flow and using a reliable accountant are good starts. Financial expert Erkki Niskanen gives advice on how to avoid pitfalls and strengthen your business’s shock resistance.

A trustworthy pal, profitability and cash-flow calculation. These are perhaps three initial things a business owner should sort out to avoid financial and payment difficulties. 

“The most common problem is money running out, be that because the business isn’t profitable, it’s made unwise investments or it has an unrealistic growth plan,” says Erkki Niskanen, a specialist at the Yrittäjän talousapu financial counselling service. 

Niskanen knows what he is talking about. Over 30 years, he has helped around 450 companies restructure themselves and reorganize their finances. He also owns several companies and sits on over ten boards of directors. 

To avoid problems, a business owner would do well to remember some of Niskanen’s advice.

1. Find a trustworthy pal

Niskanen urges business owners to talk about their company’s finances and market suitability with someone they trust.

“If a small business owner doesn’t have anyone like that, they should get one, such as another business owner they don’t compete with in the same sector, or a business mentor from their local area. Bigger companies, then, should have a board in place.”

2. Don’t forget the importance of cash-flow calculation

Business owners should regularly monitor their income and expenses and record them in a regular Excel spreadsheet, for example. Niskanen says that a shocking number of business owners do not understand the importance of a cash-flow calculation.

“It’s hard to stress enough how important it is. It helps you calculate whether there’s enough money on a weekly level, in other words, evaluate sales and other income, overheads and finance income such as loans, as well as any repayments on finance.” 

A spreadsheet also serves as a forecast for the coming weeks and months.

“It’s established itself over the decades in negotiations with financial backers, specifically as a 13-week cash flow or quarter.

“A business owner does it themselves. They look at the horizon, which flees as they approach it, and it’s worth their while evaluating that horizon somewhere like in a spreadsheet.”

Niskanen reminds business owners to do all their calculations inclusive of tax.

3. Get a reliable accountancy firm

Niskanen says that choosing the right and a reliable accountancy firm is very important, as the business will use its services and expertise regularly. If an accountancy firm is not competent, the business’s finances could suffer severely.

“Anybody can set up an accountancy firm, and over the decades I’ve seen that there is not enough competence out there.

“There are very good single-person firms, but nevertheless I wouldn’t hire one. The firm depends on a single person, who could fall ill or the like. I’d hire an accountancy firm with several employees, they’re not much more expensive. Of course, the accountancy sector is beginning to consolidate.”

4. Keep a cash buffer

It is a good idea for a business owner to have money in reserve, a cash buffer for a rainy day.

“If you’re a single-person business, a buffer of a few ten thousand euro is good, and in a larger company, say with five million in turnover, a reserve of a million is good. It’s also easier to get a bank loan when you have your own nest egg.”

5. Raise your YEL as high as you can

“I wouldn’t set my YEL pension insurance at a level set by the government, because it’s difficult for an outsider to assess it. To a business owner, I’d say that’s worth keeping it as high as possible, because it’s a pension that you’re guaranteed to be paid. Things would have to be pretty bad in Finland for that not to happen,” Niskanen says.

6. Monitor profitability regularly

Profitability is the lifeblood of a business, so it should be monitored regularly and steps taken if necessary to improve it. The basis of profitable operations is naturally that the business generates more than it consumes.

“I’d approach the issue by thinking about where a business does and doesn’t have a competitive edge. If a business owner is passionate, creative and takes initiative, that brings a competitive edge. Financial competence in itself does not create a competitive advantage, but it’s a must.”

A business should be built profitably from the very start with a precise financial plan and the right pricing. Active client acquisition is a requirement for the business’s operations and profitability.

Niskanen spoke about businesses’ shock resistance and retention of profitability at an information session organized by the Yrittäjän talousapu counselling service in August. That is a nationwide service that offers help and advice for small and medium-sized businesses and their owners facing financial and payment difficulties.