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Paul Choy
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Copyright (c) 2012 by Paul Choy
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Five Steps To Small Business Success
Version 1.0
By Paul Choy
Copyright (c) 2012 Pachworks

Copy Editor: Heidi Stephens - www.heidistephens.co.uk
Graphic Design: Catherine Giaquinto - www.catherinegiaquinto.co.uk

Note: Whilst every effort has been made to ensure that the content of this book is technically
accurate and as sound as possible, neither the author nor the publisher can accept responsibility
for any injury or loss sustained as a result of use of this material.
Step One: Manage the Money
Step Two: Manage the People
Step Three: Managing The Decisions
Step Four: Manage the Communication
Step Five: Managing Yourself
And Finally
For my father, France,
who taught me everything
I know about business.
About The Author
For many years of my life, I had one single focus: achievement.
Whether that achievement was in business, running an International Investment company for
many years; or in sport, winning four World Karate Championships, while coaching thousands of
people to fitness success.
But, in 2010, feeling I had lost sight of what really mattered in life, I decided to simplify my life
and and broaden my horizons. I moved from the UK to the beautiful island of Mauritius in the
Indian Ocean.
Today, I lead a quiet life. I spend time with my family. I walk on the whitest sands and surf and
dive in the bluest waters. And I enjoy creative pursuits like writing stories like this.
I actively encourage questions or feedback and would love to hear your thoughts, so feel
free to get in touch at www.paulchoy.com.
So here’s the thing. Running a small business is not difficult. It’s not even a little bit difficult. In
fact, I would go so far as to say that running a small business is easy if you follow these five

essential steps to small business success.
Which of course begs the question of why so many perfectly good small businesses fail.
Honestly? It’s because businesses are run by people, and people have a tendency to mess up.
Let’s start by making some assumptions.
Firstly, let's assume that you are either the owner of, or have the responsibility for, a small
business, or are thinking about starting one up. Otherwise, why are you reading this book?
Haven’t you got anything better to do?
Next, let’s assume you have the skills required for that small business. So, if you run a sewing
machine repair shop, I’m going to assume you actually know how to repair sewing machines.
Sound reasonable? Good.
Finally, let’s assume you have customers willing to pay you.
Woah, stop right there. Not what you were expecting? OK. Let’s get something out of the way
right from the very start.
This book will not tell you how you get customers to buy your products or services. That’s up to
you. It’s not like the world is short of books on sales and marketing, is it?
In addition, this book will not tell you how you do your job. If you do indeed run a company that
repairs sewing machines, it is up to you to learn how sewing machines work.
What this book absolutely will tell you is how to make sure that, assuming you have customers
and you have the ability to do the job, you don’t screw up by failing to run your small business
A common misconception seems to be that most small businesses fail because they just can’t sell
enough of whatever product or service they offer. But in my experience (which covers 20 years
of advising small businesses, since you ask) an awful lot of them had a perfectly healthy number
of customers. They just failed at the basics of running a business. Some messed up their cash
flow forecasts and simply ran out of money. Others messed up their delivery and lost the
customers they had.
One of the main differences between small businesses and larger corporations is that small
business operators have to be a jack of all trades. Large businesses will have people who
specialise - someone who’s an expert in accounts or HR, or a specialist in quality assurance.
Small businesses operators will have to deal with all this and plenty more, and for many this
means making it up as they go along.
It doesn’t matter how much training and experience the small business owner has in their
particular sector, chances are he or she has never been taught how to actually run a business. The
operator of the sewing machine repair shop might be able to dismantle a sewing machine and
rebuild it in a matter of minutes, but can he or she reconcile his business bank account or plan a
staff roster?
Disciplined business management is absolutely fundamental to a successful small business.
Without it that business will always be living on the knife edge between success and failure, even
though you may not be aware of it.
The good news is that running a disciplined small business is really not difficult, especially if you
follow the five steps that I am going to outline in this book.
Why should I read this book?
That’s a fair question? Any quick internet search will find a library full of “How to run your
business” type books. So what makes this one any different?
Well, for starters this book is specifically about operating a small business. If you work with a
larger business there will still be plenty here that’s of relevance to you. But this book talks more
directly to the small business operator who will almost certainly be able to relate to most, if not
all, of the issues I cover within this book.
By “small business”, I’m talking about organisations with an annual turnover of less than £2m,
and less than 50 employees, although it equally applies to a business with 2 employees turning
over £50k.
Also, you haven’t bought this book. I have given it to you. I have done this gladly because I truly
believe the information in this book belongs to everyone, and should be freely available to you
and every small business operator.
But there’s another thing. By giving this book away without charge, I have freed myself from the
burden of having to tempt you to buy this knowledge from me. Most of the books you’ll find on
how to run your business expect you to pay for them, so they make you promises to justify your
investment. Like “I can help you turn your business around without you having to do any work”
(they can’t). Or “I can help understand what goes through the minds of your customer” (they
definitely can’t).
Because no cash has exchanged hands, I can be honest with you. Brutally honest sometimes,
bordering on downright rude. And being in business often requires brutal honesty. The
information I present you with in this book will sometimes be uncomfortable to read. It will often
be challenging to implement. But the five steps I outline here are absolutely essential in achieving
sustained success of a small business.
So, why should you listen to me?
Because I know what I’m talking about.
I’ve been successfully running small businesses for over two decades, and these small business
have collectively become a much larger business with a multi-million pound turnover, employing
staff halfway around the globe.
Over the course of these two decades, I have learned an awful lot about running a small business.
And I’ve also made some whopping mistakes, which I can now help you to avoid.
As well as running my own business, for many years I have been helping small businesses all
around the world deal with challenges they face. Working with these companies has shown me
something really striking - I see exactly the same mistakes being made by all sorts of small
businesses, no matter what country or language spoken.
These mistakes are human ones, not related to culture or business climate. Running a business is
the same all around the world.
I am not an accountant. I have no business qualifications. I’m not even sure I would make a very
good employee in someone else’s company. But what I’m sharing with you in this book are the
grassroots lessons I have learned through building small businesses around the world.
Mostly you should listen to me because I will tell you exactly what you need to know, without
any sugar coating, ego-stroking or jargon-laden fluff.
Opening your mind
Here is my challenge to you. If I commit to telling you what you really need to know about
running a small business, are you truly ready to open your mind to listen?
Without exception, the biggest hurdle I encounter in helping small business operators to secure
their long term business is overcoming the blinkered views of the operators themselves. They ask
for help, but don’t actually want to make any changes to what they currently do.
In this book I am going to share with you the five steps that I believe you need to follow to
operate your small business. You may agree with me, or you may not. All I can tell you is that the
advice I give in this book has worked for me, and for the many other small business operators I
have helped over the years.
Whether the information contained in this book can be made to work for you entirely depends on
your willingness to take it to heart and apply it for yourself. That needs to be your commitment.
So, are you ready to commit to your small business?
Step One: Manage the Money
In 2011 I was asked to provide assistance to a software development company that was just a few
weeks away from going out of business.
The company, which was founded by two incredibly motivated and talented people, had been
running for nearly two years and had a healthy customer base.
Despite this the company had ran into trouble. Their problem was that they had too many
customers rather than too few. As a fairly new business, still afraid of losing any potential sales
by delaying the start of new projects, they had agreed to an immediate start of virtually of every
job they quoted for.
So instead of having five projects that they could comfortably finish and invoice for, they found
themselves struggling with ten half-finished jobs. And, although all the customers had all paid a
deposit to start their projects, the balance for each job remained unpaid until they were finished.
Worse still, the company had been regularly late in paying their staff over the previous few
months and several had left the company as a result. Although the remaining staff team were
committed to the company, they had made it clear that they would not continue to work if the
salaries were late again. Without the staff the company would not be able to finish the current
projects and would go out of business.
When they contacted me for assistance they were just three weeks away from their next salary
date and didn’t have enough cash in the business to make the payments. They had approached
their bank for a temporary overdraft, but had been refused as they were unable to demonstrate
they could provide enough security, even if that borrowing was only a short term overdraft.
This was a completely avoidable situation which perfectly demonstrates the danger of financial
mismanagement, specifically the lack of cash flow forecasting.
This company had customers who wanted to buy their services. They had the ability to provide
these services. They simply ran out of money to take these projects to the finish line and ensure
they got paid.
The solution was obviously to get cash, and fast.
The advice I gave was to approach their current customers, offering them a discount on their
project if they would make an immediate, interim payment for the work completed so far. The
company wasn’t keen on offering a discount, but agreed there was no point being able to charge
full price if you go out of business before you can collect.
Of course there was a risk that their customers could become nervous that the company was
struggling financially, but most companies have experienced their own cash flow pressures at
one time or another, and will usually understand the need to raise money.
Generally, however, the customers were responsive. They were happy with the progress of their
projects so far, and enough of them took up the discount for the company to raise more than half
the funds they needed to meet their immediate commitments.
Armed with this cash injection, along with a simple but detailed cash flow forecast we prepared
to demonstrate how the company could manage over the next three months, the company
approached the bank again. This time the bank was more confident in the company, and provided
an overdraft facility which allowed the company to pay all their outstanding bills, including their
Now that company continues to grow, and whilst developing a new business is always
challenging, at least they are still in business.
Let me be blunt here. Get this step wrong and your business will struggle.
Learning how to maintain financial control of your small business is not complicated, but it does
require a LOT of discipline. Undoubtedly this is the area where most small businesses I work
with need help, and here’s the reason why:
Virtually all the income you receive from your customers has been spent before they even pay
It never fails to amaze me how many small business operators don’t realise this, that the money
they just put into their pocket doesn’t belong to them. And because the money is just sitting there,
burning a small hole, those businesses will often spend it on other things that they don’t really
need. And then when it comes to paying their bills later on, there isn’t enough money left.
Lets have a think for a moment about why most of the money in your pocket doesn’t belong to
For starters, a big chunk of the money belongs to your staff, whose monthly salary will soon need
paying. Another chunk will go to your landlord or mortgage company for the property your
business operates from. What about suppliers? They’ll need paying too, and then of course
there’s the tax man. He definitely doesn’t think that money in your pocket belongs to you, and
can’t be avoided.
When you stop and think about it, hardly any of the money a customer pays to your business
stays with you for very long at all.
The point here is that just as quickly as you receive income, you are going to be spending it. This
makes planning absolutely vital in successfully managing the finances of your small business.
Planning and a little help from some small boxes.
Now, when I say small boxes, I don’t literally mean boxes (although I guess you could if you’re
the literal type). I mean imaginary boxes that you can use to implement a very simple form of
financial management that can make all the difference to the stability of your small business.
We’ll get to the boxes in a minute. First, let’s talk magic numbers.
Magic Numbers
I am always amazed at how little many small business operators know about the state of their
own business. They seem so caught up in the day-to-day activities of the business, they forget to
take a step back now and then to look at where they are, and perhaps more importantly where
they want to be.
But what if I told you that if you track just five numbers relating to your business you could use
these to tell you virtually everything you need to know about the strength of your small business?
These are the five numbers that every small business should constantly be aware of, and I call
them magic numbers. They are:
1. Reporting Period
2. Projected Gross Income
3. Budget Expenditure
4. Non-Budget Expenditure
5. Profit
Together we are going to explore how, with these five numbers, a small business operator can
deduce almost everything they need to effectively manage the finances of their business and
make plans for the future.
But before we get into all that, let’s take a few moments to just be honest about a few things. We
all know that whilst financial business management is important, it is not exciting. Understanding
it will not make you more attractive to the opposite sex, nor will it impress your mates down the
pub. Even worse, if you are not used to financial management, this chapter is probably going to
make your brain hurt a bit.
But I promise you, if you do learn how to effectively manage your small business finances it can
have a dramatic impact on the stability of your business.
At first glance, trying to understand and interpret these magic numbers can seem confusing and
you are going to be tempted to skip this chapter. Don’t. Because although this information may
seem daunting, it isn’t. In reality learning how to use these magic numbers is very simple once
you grasp the basic concepts.
So, before we begin I want you to go and grab a big mug of tea or coffee to drink while reading
this. Go now, I’ll wait …
Now find somewhere quiet where you won’t be interrupted or distracted for the next fifteen
minutes while you read, and then re-read, this next chapter. It’s the only way you’re really going
to get to grips with the information I am about to share with you.
OK, lets get started. First we need to learn a little more about each of our magic numbers.
Reporting Period
Our first magic number is the duration of time we are measuring against. This is called Reporting
Period. This period can be anything you want, but will usually be a trading year.
As well the duration of the Reporting Period, from a planning point of view it is also useful to
know how much of that period has passed. This is called the Reporting Period to Date, and it is
expressed as a percentage.
So, if you’re three months into a twelve month period, then your Reporting Period to Date would
be 25% (3 months being 25% of 12 months). If you have yet to start your Reporting Period then
your Reporting Period to Date would be 0%, whereas if you are in the eleventh month then your
Reporting Period to date would be 92% (11 months being 92% of twelve months).
Projected Gross Income
Probably the most important of the magic numbers that every small business operator should
know is the Projected Gross Income (PGI). It is the total income you expect to generate over the
entire course of your Reporting Period.
This number is especially useful for financial planning purposes. Only by having an accurate
estimation of your likely income can you plan how much to allocate to expenditure for operating
your small business. After all, if you don’t know how much you are likely to have, how can you
accurately decide how much you can spend?
To establish your Projected Gross Income, there are two pieces of information you need - your
Actual Income to Date and your Expected Future Income. Let’s have a look at each of these in a
little more detail.
Actual Income to Date
Your Actual Income to Date is simply the total amount you have generated since the start of the
reporting period.
Surprisingly, a lot of small businesses have no idea how much money they are currently making.
If this describes your company and you don’t routinely track your income, that’s OK. But if you
want to get a hold on your numbers, now would be a good time to start.
Expected Future Income
This is the amount you reasonably expect to generate over the remainder of the Reporting Period.
How you calculate your Expected Future Income very much depends on your business. The most
obvious method is to take your Actual Income to Date and use this as a basis for your future
For example, if your company has generated £30,000 of actual income over the first three months
of your reporting period, giving you an average of £10,000 per month, then it would be
reasonable to assume your Expected Future Income for the rest of the year might be £90,000 (9
months at £10,000 per month).
Of course you should remember to adjust that figure to take into account whether you expect to
perform better or worse during the remainder of your reporting period. Factors that can influence
this include:
• Seasonal trading affects, such as the holiday season.
• Known upturns or downturns in the industry you operate within.
• Any forthcoming closures, such as for renovations or holidays.
Out of all the numbers relating to your business, your Expected Future Income is the only one
that is subjective (meaning you will have to make your best guess). The most important
consideration when deciding on your Expected Future Income is that it should be a realistic
estimation. I come across so many business who confuse how much they wishfully hope to
generate with how much they can realistically expect to generate.
Wishful thinking without substance is unrealistic and will lead to the rest of your magic numbers
being unreliable. A good rule of thumb when deciding on your Expected Future Income is to err
on the side of caution and only include income you are confident you can generate.
Once you have established your Actual Income to Date and your Expected Future Income
calculating your Projected Gross Income is simply a matter of adding the two together.
For example, supposing you are half way through a one year reporting period and your Actual
Income to Date for the first six months is £100,000. Assuming you will repeat the same level of
income for the second half of the year your PGI would be £200,000:
£100,000 - Actual Income to Date
£100,000 - Expected Future Income
£200,000 - Projected Gross Income
However, you might have looked at your business and decided to reduced your income estimate
for the remaining six months of your reporting period, by say £20,000. This would mean a PGI of
£100,000 - Actual Income to Date
£80,000 - Expected Future Income
£200,000 - Projected Gross Income
The more you work with your PGI, the more you will find that it becomes central to your
financial planning process as it will drive almost everything else.
Budget Expenditure
So having established our income numbers, it’s time to look at the expenditure side of things.
Lets start with the Budget Expenditure.
Budget Expenditure is all the routine, day-to-day spending that the business incurs over the
course of the reporting period in order to operate. This makes up the vast majority of a business’s
total expenditure.
Let’s have a think about this in terms of your personal household expenditure. Your Budget
expenditure would be for things like your rent, your utility bills (water, gas, electricity). These are
the costs you will incur on a regular basis to keep your house running.
Rather than thinking in terms of cash amounts, I prefer to express budget expenditure as a
percentage of the Projected Gross Income, for example supposing you had a starting PGI of
£200,000, you might allocate 70% of that as budget expenditure rather than the cash amount of
The reason for this is dynamic planning.
‘Dynamic’ in this context relates to the ability to change automatically. By setting budgets as a
percentage of income, this percentage stays the same regardless of what happens to your income
figure, whereas a budget calculated in cash will need recalculating any time there is a change in
your expected level of income.
Non-Budget Expenditure
If Budget Expenditure covers the routine expenditure your small business will incur over the
course of the Reporting Period, Non-Budget Expenditure is the expenditure above and beyond
the essentials of the business.
Lets go back to the example of your personal household expenditure. Non-Budget expenditure
would be for things like redecorating your house, something that you might have to do twice in
the next year or not at all for five years.
Focus on Non-Budget Expenditure
Whilst most small business operators will easily understand (although not always implement) the
need to plan to their day-to-day business expenses, effective planning for Non-Budget
expenditure can be a little trickier. It may be easier explained with an example.
A few years ago I was talking to a friend about this very thing. He ran a small restaurant and I
had been helping him to prepare his cash flow and budget systems so he didn’t constantly have to
pinch money from here and there to pay his bills. I had given him a spreadsheet that detailed
some of the things he would need to spend money on, and asked him to think about how much of
his income he wanted to allocate to each.
One of the items on the list was renovation, but he had left this blank. When I asked why, he told
me that he didn’t see the need to budget anything for this. He had just finished redecorating his
restaurant the month before, which had cost him in the region of £20,000. As he had only just
finished this work he saw no need to budget more for it right now.
When I asked him when the restaurant was last renovated, he told me that it had been done about
three years previously, and had cost about the same. What he hadn’t considered was that,
assuming that he may need to do similar renovations three years from now, he needed to allocate
over £500 per month to be sure the funds will be there when he needs them.
The reason for planning your Non-Budget Expenditure is often not obvious, until the day you
realise you need the funds for something out of the usual routine and you don’t have them.
Expenditure Ratios
As part of their financial planning, every business needs to decide how much of their income to
allocate for Budget and Non-Budget Expenditure. A business that allocates too much to their day-
to-day Budget Expenditure may find themselves in difficulty when it comes to the type of “out of
the blue” spending that Non-Budget Expenditure is for. On the other hand, allocating too much
for Non-Budget Expenditure and there may not be enough money to actually run the business.
The exact split between these two categories of expenditure is very much dependent on each
individual business, but in general a 10:1 ratio between Budget and Non-Budget works for most,
so for every £100 you allocate to Budget Expenditure you might spend £10 on Non-Budget.
OK, if you are reading this it means you’re still with me and haven’t skipped ahead to the next
chapter. Well done!
Now I know that all this talk of projections and reporting periods is not particularly interesting.
So lets discuss something that might capture your imagination: your profit.
It doesn’t matter whether you are the small business owner or a Manager employed to operate the
business on behalf of the owner. Either way you will no doubt have a vested interest in the
company’s profit.
Your profit is the income you have left after you have incurred the expenditure needed to operate
your business. Make no bones about it, although profit is the last of our magic numbers it is
easily the most important. And yet so many small business operators forget this and allow their
business expenditure to eat into their profit, sometimes swallowing it completely.
Although profit is usually quoted in terms of actual amounts, I find that a more relevant statistic
is the margin. The Profit Margin is the proportion of total income the profit represents expressed
as a percentage of the total income. So supposing a business generates £150,000, of which
£30,000 is profit, their profit margin would be 20% (£30,000 being 20% of £150,000).
Generally I advise that a Profit Margin anywhere above 20% is healthy (I always use 25% as the
target margin within my own companies).
Somewhere between 10% and 20% is acceptable during periods of growth, where the company
may be investing more to achieve greater profit in future years. But this should only really be for
a set period of time, as part of an specific growth plan, rather than as standard year-on-year profit.
I would question the point of operating a company at all where the expected PM is below 10%.
You see, profit doesn’t come for free. There is a price to pay for that profit, and that price is
called risk. Achieving any sort of profit always comes at the risk of making a loss. It’s your profit
margin that serves as your protective buffer zone, helping you to mitigate that loss.
Lets assume a company makes a profit of around 25% of their Projected Gross Income,
consistently year after year. If one year their industry sees a sudden downturn of 15 percentage
points, the company will still end the year with a 10% profit margin. This gives them the
breathing space they need to adjust their spending if they think the downturn will continue.
On the other hand, if a business that year after year only achieves 10% profit of their PGI sees a
15 percentage point downturn, they are now losing money and the owners would have been
financially better off sitting at home watching TV.
Ensuring your company maintains a healthy profit margin is not just about achieving as much
income as possible for that company, it’s also about providing a safety net for the future.
Filling In The Gaps
OK, so now we know a little about magic numbers, what can they tell us about the financial
strength of a business and to assist us in making plans for the future? Let’s find out more about
the power of these magic numbers by taking a look at a typical monthly financial report for an
example company that I am going to call DemoCo Ltd.
Reporting Period Start: 01 January - 31 December
Starting PGI: £200,000
Actual Income to Date: £60,000
Budget Expenditure to Date: £42,000
Non-Budget Expenditure to Date: £4,000
Profit To Date £16,000
This simple financial statement can already tell us quite a lot of useful information, and as you
can see it statement contains all our magic numbers. Useful as these numbers are though, they are
they only tell us part of the story. We need more information if we are to really be able to
maintain financial control.
Fortunately what makes these numbers magic is that we can use them to unveil everything else
we need through simple deduction. Think of it like sudoku for your business!
Firstly lets work out where DemoCo Ltd is at the moment. From the financial statement we can
see that DemoCo Ltd’s Reporting Period is one year from the start of January. We can also see
that this statement was produced at the end of April, which marks four full months of the period.
We can therefore calculate that the Reporting Period to Date is 33% (4 months is 33% of 12
months). This is how much of the Reporting Period the company has completed.
Now let’s turn our attention to DemoCo’s income. We can see that they started the year with an
expected PGI of £200,000. Remember, PGI stands for Projected Gross Income, so at the start of
the year DemoCo Ltd believed that figure to be a reasonable target for the year.
Over the course of the four months that the finance report covers we know that the company
generated income of £60,000, an average of £15,000 per month. If we use this monthly average
to project this forward for the remaining months of the Reporting Period this would give an
updated PGI of £180,000:
Actual Income to Date: £60,000
Expected Future Income: £120,000 (£15,000 per month for 8 months)
Updated PGI: £180,000
So, already we can see that if DemoCo Ltd carry on performing at the rate they have been they
will not achieve their target of £200,000 by the end of the Reporting Period. But how far behind
their target are they?
Having already established that the company has completed 33% of their reporting period we can
deduce that for DemoCo Ltd to be on target at this point they would have needed to have
generated 33% of their target income. 33% of £200,000 is £66,000, so this is how much they
were meant to have generated by now. From the financial report we know that they have actually
generated £60,000, which is 30% of their target. So they are currently 3% behind where they
needed to be on target, which equates to £6,000.
So much for income, what about expenditure?
The financial report tells us that so far DemoCo Ltd has spent to total of £46,000 within the
Reporting Period.
£42,000 of this spending was on Budget Expenditure, the day to day costs DemoCo Ltd incurred
running their business. A few simple taps on the calculator will tell us that this equates of 70% of
the income they generated. The other £4,000 was for Non-Budget Expenditure which equates to
7% of the total income generated. The combined totals for budget and non-budget expenditure
equated to 77% of the £60,000 income generated over the course the reporting period so far.
OK, so now we have also dealt with the expenditure. Now lets think about profit. Well we
already know from the financial statement that DemoCo Ltd have posted profits of £16,000 but
that only tells part of the story. Calculating the profit margin that £16,000 represents will give
greater context to this amount.
The Profit Margin is the proportion of total income the profit represents. For DemoCo Ltd we can
calculate a margin of 23% (£16,000 being 23% of the £60,000 the company has generated).
Beyond The Facts and Figures
So now have a much fuller picture about DemoCo Ltd than we knew before. We now know:
Reporting Period to Date: 33%
Current Rate of Budget Expenditure: 70%
Current Rate of Non-Budget Expenditure: 7%
Current Rate of Total Expenditure: 77%
Current Profit Margin: 23%
Updated PGI: £180,000
Current Income Shortfall: £6,000
Projected Total Shortfall: £20,000
Now that we have filled the gaps that were missing from the financial statement and have a lot
more information, what does that information actually mean for the real world? Well, there are a
few things that stand out:
1. Based on their current performance they are not on track to achieve their income target by the
end of their Reporting Period. At present they are £6,000 behind where they need to be to stay on
track for their target. It may be that this was expected due to seasonal variations in their trading
pattern, and they plan to make this up later in the year when trading increases. If not, at least they
now know that need to increase their current level of income or they will complete the period
£20,000 behind their expected target.
2. Their Budget to Non-Budget Expenditure ratio is 11:1, so for every £11 they spend on day to
day expenditure they spend £1 on non-routine expenditure. I generally advise to try and maintain
around a 10:1 ratio so this is well within reach of this standard.
3. Their current profit margin is a healthy 23%, however although they are in profit they are not
currently making as much profit as they originally anticipated.
All in all then DemoCo Ltd seems to be managing their finances reasonably well. They have a
healthy distribution of expenditure and profit, they just aren’t making as much income as they
originally planned for. They now know that they need to concentrate their efforts on increasing
their income safe in the knowledge that their expenditure levels as within acceptable levels.
Small Boxes Make A Big Difference
Thanks to our magic numbers, we now have a lot more information to guide us in taking control
of our small business finance. But control is so much more than just facts and figures - we also
need to take action.
Throughout this chapter I have been using the term financial management. But for many small
businesses operators, their finances have a tendency of managing them rather than other way
round. Income comes in, but by the time the bills start arriving there isn’t enough in the bank to
pay them, the money having slipped away like water through a leaky pipe. The reason for this is
the simple lack of discipline I mentioned at the very start of the chapter.
Often, in life as well as business, the simplest approach is the usually best. This certainly applies
to financial management. The simple approach to the leaking income problem is to allocate the
income as soon as it arrives, and then to find the discipline to only use those funds for the
allocated purpose.
This is where our small boxes come in. Remember them? We are going to paint an imaginary
picture where these small boxes will help you visualise one of the simplest and yet most effective
forms of financial control.
Let’s begin by creating our boxes. Imagine yourself creating one box for three of our magic
numbers. You will create one for Budget Expenditure, another for Non-Budget Expenditure and
lastly one for Profit.
Now, try to visualise that every time you generate income, no matter how big or small, you are
going to immediately split that income up onto the various little boxes. Most of that income will
go into your Budget Expenditure box ready for you to spend on all the day to day expenses you
incur operating your business. You will put some into your Non-Budget Expenditure box ready
for any non-routine expenditure that comes your way. And you will put the rest into your Profit
box as your reward for the time and effort that you put into generating the income in the first
And then you will close the lids on each of the boxes. Close them tight! Then lock them, and
double lock them. Do everything you can to put make each of those imaginary boxes
impenetrable until you need to access the funds they contain, and most importantly of all keep
each box separate from the others.
• What goes into the Profit box stays in the Profit box - it doesn’t get used for anything except
profit. No matter how tempted you are to dip into your Profit box (no doubt thinking you will put
it back at a later stage), don’t. If your expenditure boxes are a bit light, you’ll just have to spend
• What goes into the Budget Expenditure box stays in the Budget Expenditure box. It doesn’t get
used for anything except budget expenditure. Don’t be tempted to dip into this to top up your
profit, assuming that you will put the money back. Invariably you won’t, and then you will find
yourself short when you have bills to pay.
• What goes into the Non-Budget box stays in the Non-Budget box. It doesn’t get used for
anything else. At some stage you are going to need the funds in this box, you just don’t know
when. If you start dipping into this box thinking you will have time to put it back later I can
guarantee you’ll find yourself short just when you need it.
When dealing with the contents of each small box, you need to pretend that all the others small
boxes don’t even exist. Each box is for a specific purpose, and this purpose is set in stone.
Sounds simple, doesn’t it? That’s because it is. Or more truthfully, it’s simple to understand.
Finding the discipline to not take from one box when another is running short - that takes a little
more effort.
This system of using small, imaginary boxes to allocate the income we generate has a name
(albeit not a very exciting one) - it’s called Budget Setting.
Setting and managing those budgets is one of the most important financial requirements of every
business, big or small. And yet the vast majority of small businesses operate absolutely no budget
control whatsoever. Often this is because they think that managing business budgets is more
complicated than a bunch of imaginary boxes.
Instead they will simply spend when they need to spend over the course of the year, and hope
they have something left at the end as profit. What those small business operators don’t realise is
that there is one, HUGE reason why they should be using some sort of budget system. The reason
is so your can PROTECT YOUR PROFIT.
There are no money trees
If there is just one thing that I want you to take away from this book, it’s this. It is my absolute
golden rule of business is, PROTECT YOUR PROFIT.
Sounds obvious, doesn’t it? And yet so many small business operators forget and end up allowing
their business expenditure to eat into their profit, sometimes swallowing it completely.
I have lost count of how many business operators I have met who haven’t got a clue what their
current level of profit is, seemingly happy to wait until the end of the year to discover whether or
not there’s anything left in the pot. Crazy!
Think about this, would you accept a job where you are not told how much you will get paid, or
even if you would be paid at all, until the end of the year? Of course not. You would insist on
agreeing a salary at the start of the year, and under no circumstances could this be lowered on a
Running a company is absolutely no different. To effectively protect your profit, the very first
thing you need to decide is how much of the income you anticipate making is going to be put
aside as your profit.
At the risk of being repetitive let me restate that clearly. YOU decide what your profit will be.
Far too many small business operators make the mistake of thinking the market decides their
profit. They make as much as they can, spend what they have to spend, and whatever is left is
their profit.
No, No, No!
What you should be doing is generating as much income as you can. and then deciding how
much of that income you want to set aside as profit. If you want a profit margin of 25%, then
make sure that 25% of all the income your company generates is put in your imaginary small box
for profit. The protect this profit by not spending it!
Ask yourself this:
Imagine you’re in the supermarket, doing your weekly shopping. In one pocket you have a list of
the things you need. In the other you have the cash to pay for it.
As you work your way around the supermarket you realise that you do not have enough money
for everything on your list.
What do you do?
1) Just keep putting stuff in your trolley, and hope the money in your pocket will somehow
magically increase?
2) Buy only what you can afford with the money you have, prioritising the most important items?
Most of us will have experienced something like this situation at one time or another, where we
have things we need to buy, but not enough money in our pocket to pay for everything.
Now I guess you could try option 1, hoping your money will somehow magically increase, but
you won’t get very far. The only thing we can do is accept the reality of the situation and only
buy what we have enough for in our pocket.
A small business operator must learn to do exactly the same thing in their business.
The funds that have been allocated for business expenditure, and put into a small imaginary box
ready for that use, are for meeting as much of the spending requirement for the business as
possible. If those funds are not enough to cover everything on their list, that business will simply
have to prioritise what they can afford and leave the rest.
What that business must NOT do is dip into the small box allocated for profit. That box needs to
stay off limits, no matter how well intentioned you try to be, and how much you promise to put it
back as soon as you can.
I can tell you from experience, having seen many, many small business operators do exactly the
same thing, you will never put back what you have taken out. That profit will be gone, and when
you look back you will not be entirely sure where it went. It will have just leaked out on things
that you will later realise you could have managed without.
To successfully manage the finances of a small business, it is essential to learn how to to leave
each box alone. Otherwise you run the very serious risk of not having enough in each small box
for when you need it.
Right, lecture over. Let’s turn our attention to how we can use this information to make a
financial plan for the future. For that we are going to need our small boxes again.
Magic Number Summary
• Reporting Period - The financial period that the magic numbers refer to.
• Reporting Period to Date - The proportion of the Reporting Period that has passed, as a
• Actual Income - The total income generated since the start of the Reporting Period.
• Expected Future Income - The income you expect to generate over the remainder of the
Reporting Period.
• Projected Gross Income (PGI) - The total income you expect to generate over the entire
reporting period, calculated by adding the Actual Income to Date to the Expected Future
• Budget Expenditure - The proportion of PGI allocated for the day to day operating costs of the
business, as a percentage.
• Non-Budget Expenditure - The proportion of PGI allocated for expenditure outside normal
operating costs, as a percentage.
• Profit Margin - The proportion of PGI allocated to the business profit.
Managing Your Cash Flow
Business Managers will often throw around the term cash flow without really understanding what
it means. Very simply put, it’s the flow of cash in and out of your business. Managing the cash
flow of your small business can sometimes be the difference between success and going out of
Consider the following scenario;
DemoCo Ltd
Monthly Income /
Expenditure Projection
Income Due: £15,000
Projected Expenditure: £12,000
Projected Profit: £3,000
On paper everything looks fine. DemoCo Ltd expect to generated more income for the month
than they plan to spend. So they can relax and look forward to the profit rolling in, correct? Well,
maybe not.
Often, when it comes to cash flow planning, small businesses will only look at the picture at the
start and end of each month but what about the cash flow over the course of the month?
Supposing we made the Income / Expenditure Projection a little more detailed.
Keys Dates This Month
Income due:29th
Salary payments:28th
Now you can see that DemoCo Ltd has a problem.
The income they are expecting will not arrive until after they’re due to spend some of it on
business expenditure. On paper they looked fine, but in reality they will have a cash flow
problem for the month in question. I call these occasions, where cash is scheduled to come in
after it’s due to go out, cash flow hotspots, and one of the main benefits of cash flow forecasting
it to predict those hotspots, allowing the business to take action where necessary.
Effective cash flow management does not need to be complicated or time consuming, but it does
need to be done. The good news though is that for most small businesses there is little need for
the traditional two- or three-year cash flow forecasts that larger business will keep. Providing you
routinely monitor your magic numbers, you will probably not need anything more for longer term
Rather than looking over the next three years, most small business operators will benefit much
more from looking at just the next three months concentrating their efforts on tracking the daily
cash movement.
This can be as simple as keeping a spreadsheet or similar document, and recording when during
each of the next three months you expect your income to arrive and your expenditure to leave.
You can then identify potential hotspots. For example, let’s look at an extract from a possible
forecast prepared at the beginning of the month:
You can see that the company starts the month with £400 and ends the month with £500. If they
were running a traditional monthly cash flow, they would not realise that they had a cash flow
hotspot coming heading their way on the 28th, when they are due to make their salary payments.
However, by tracking daily movement over the next 90 days, a business can easily track any
hotspots and plan accordingly. Maybe the customer due to pay on the 29th of the month can
make a slightly earlier payment? Maybe the bank, having been given confidence in your financial
awareness, could cover the payments for a day or so until the income is due?
When it comes to cash flow management, often even the most serious of problems can be
prevented before they even occur, simply by tracking upcoming hotspots and taking action
accordingly. Taking the time to plan ahead using a simple 90 days daily tracker can make the
difference between staying in control and a nasty surprise.
Step One Summary
Congratulations! You just managed to read an entire chapter dedicated to financial management,
hardly the most exciting of subjects. That in itself is an achievement. Now it is time for you to
think about putting this information into practice in your small business.
Remember, managing your finances does not need to be complicated; it just needs to be
consistent. Information is your secret weapon when it comes to keeping a firm grip on your
finances. Know your magic numbers, act on them and look out for your cash flow hotspots. Do
these things, and you will find that everything else will fall into place.
Step Two: Manage the People
Let’s be honest. If there was a single subject in the realm of human knowledge that doesn’t need
any more words, surely it has to be the subject of managing staff. There’s plenty of wisdom
available - books, articles, lectures, blogs and courses galore, all banging on at length about this
particular subject.
Which begs the question, with all this wealth of information readily available, why go over it all
again here? Well, the truth is that, whilst this vast array of information can be incredibly useful, it
tends to be a bit vague when it comes to actually implementing this knowledge in practical
That’s all well and good if you work for a large corporation, who’ll give you the training, time
and resources to find your feet in when it comes to people management. But what about the small
business operator? Being responsible for virtually every aspect of your business means you need
to get straight to the point.
So my approach is this - to take everything I have ever learned or experienced on the subject of
managing staff, and squish it all into a single chapter of just the stuff you really need to know.
Think of this chapter as the cheat sheet of every people management course out there today.
Your Greatest Resource
Whilst many small businesses can operate very successfully as a one-man-band, invariably there
will come a time where growth requires those businesses to build a team. That moment will be
the exact same moment that running a business becomes a lot harder.
It may be a cliché, but a good team of staff can truly prove to be your company’s greatest asset.
But to achieve their full potential, they need good management. Without a doubt managing
people is one of the biggest challenges a small business operator will face.
The reason for this is simple - teams are made up of people, and people are invariably
complicated. If you currently employ any staff at all, I’ll wager the majority of your time is not
spent directly managing the business, but rather dealing with all manner of staff issues, some of
them trivial, and others less so.
It is an effort that is totally worth making, however, as a good team of staff can often be the
magic ingredient in a small business. You can also make managing your team significantly less
stressful by taking a management approach that’s tailored to a small business.
Over my years in business I’ve had the privilege of managing thousands of staff. Many have been
good. Some have been outstanding. Others have been a complete disaster. The experience I’ve
gained from managing these people has taught me many lessons about how to be an effective
manager of a small business team. This can be pretty accurately summarised with three simple
Be firm but fair.
Be friendly but not a friend.
Take control but not advantage.
Everything else beyond this is pretty much just detail. Sounds easy enough, right? Whilst
managing staff is time consuming and can sometimes be frustrating, it’s also incredibly
rewarding and DOES NOT need to be complicated. You just need to follow these three simple
principles. Let’s take a look at each in more detail.
1. Be firm but fair.
Without doubt the key to successful management is consistency. Most of us can remember a time
in our past where someone in authority, maybe a parent or teacher, has blown hot and then cold
for no apparent reason; where something you did was fine one day and unacceptable the next.
You also probably remember how confusing that was.
When it comes to the operation of a small business, confusion of any kind can directly affect the
efficiency of a team, which in turn makes that team less productive.
Managing people is no different. People find comfort in routine, in knowing what is expected of
them and the rest of the team. This comfort translates into efficiency within that team.
Consistency in itself is not enough, however. A consistently bad manager is still a bad manager,
right? Rather, consistency in this case means giving the team a clear message about the standards
expected of them. These standards should be reasonable (i.e. fair) and should be expected at all
times (i.e. firm).
Consistency is the absolute key. The moment a manager loses either their sense of fairness (by
allowing some staff to perform at a lower level than others) or firmness (maybe by varying the
standard expected of the team without notice) they lose the routine and order that leads to an
effective and efficient staff team.
2. Be friendly but not a friend.
Right, you need to prepare yourself for something that, if it hasn’t already happened, undoubtedly
will. Sooner or later, as the owner of a small business, you’re going to walk into a room occupied
by some of your staff and they are going to suddenly stop talking. When you leave the room, they
will giggle between themselves like children who have just been caught being naughty.
They will try to be subtle about it, hoping you won’t notice, but they will fail. And although you
are likely to pretend to yourself that it doesn’t matter, in reality it will make you feel left out of
the joke. Even worse, you will then start worrying that the joke is on you.
The thing is, as much as you like to think of yourself as the down to earth, approachable, always-
there-for-your-staff boss, at work they will only ever see you as the boss. They may well think
that you are a great boss, but you are still the boss and that means you are definitely not one of
So here’s the thing: as human beings, we are social creatures; we crave acceptance and
belonging. We want to be part of the gang. But as managers we have to lead, organise, encourage
and unfortunately sometimes discipline the staff we manage.
At work, the boss is exactly what your staff need you to be. Even if you are personal friends with
(or related to) some of your staff outside of work, you (and they) need to know that this can not
be carried through to your working environment.
Your staff need to absolutely trust that, as a manager, the decisions you make are not conflicted
by personal relationships, and are made purely as a result of independent professional judgement.

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