People start businesses for all sorts of reasons (financial control, autonomy in operation, perceived work/life balance etc), but the fundamental reason is that they are good at whatever it is they do, not that they are necessarily good at business. There is no shortage of self-help books and advice on how to start and run a successful business but whatever the product or service being offered and no matter how customer and staff focused the business leaders are, the business will not succeed unless it makes money. And in order to do this, the business owner or leader needs to know their numbers.
I have a saying that “poor businesses react, good businesses measure and manage, great businesses predict” and this is especially true when it comes to understanding the financials, so what do you need to do this?
Well to start with, you need a budget. Budgets are not just for larger businesses, they are essential to managing the financials and they do not need to be anything esoteric, but as a former boss once said to me “hope is not a plan”, so setting up a “Financial Plan” (or budget) for the year is a very good start. This can easily be done from your Profit and Loss statement from a previous period (the previous financial year is ideal) since as Confucius once said: “Study the past if you would define the future”, however if you are just starting off, making some assumptions about what you can realistically expect to sell and what the associated costs and expenses are likely to be would be a great start.
You should monitor your progress against your budget on a regular basis (at least monthly) so that you can see whether your assumptions are accurate or not and unless you are wildly out, I recommend not changing the budget but working out what you need to do to bring things back on track. I would also recommend producing monthly charts for your sales, cost and expenses and net profit so that you have an at-a-glance understanding of the underlying trends for each.
Finally, there is a well-known maxim that states that “Turnover is Vanity, Profit is Sanity, Cash is Reality” and this is very true since businesses tend to fail due to lack of cash more than any other reason. Again, this requires using previous information and everything you can see coming down the line from a sales receipts, costs and tax perspective so that you can know before it happens that you may be getting low on funds.
At OrgMent Business Solutions, we have a range of simple tools and templates that enable businesses to manage their financials in just less than an hour each month, so please let us know if you would like to find out more.
Ian Ash, AInstIB
Managing Director, OrgMent Business Solutions