Don’t Be a Statistic, Be a Master of Your Money! Simple Tools for Business Success
By: Michelle Landis
ActionCOACH of Greater Lehigh Valley/Berks
Considering that 50% of small businesses fail before the end of their second year in business, and of those that survive, many do not come close to their original projections, profits or the free time the owner(s) expected, I feel that Financial Mastery in business is a very important subject to discuss. So, when it comes to your business, are you a master of your money?
Most business owners, when asked, believe that they have financial mastery of their business. But when it comes down to it, are you certain that you have the fundamental financial insights into your business to help you make great decisions? The truth is that many businesses run out of money before they can produce profit on their own. So, to assure that you gain financial mastery in your business , we want to review some simple tools to help you. After all, business success heavily depends on a business owner’s planning, organization, and good money management.
Know Your Numbers!
Financial Mastery begins with having access to your business financial reports on a regular and timely basis. All too often, business owners rely on their accountant to manage their numbers for them. Believe me, good accountants are worth their weight in gold, but they are not living and breathing your business on a daily basis. By all means, rely on your accountant, but never abdicate 100% of your numbers and money management. No matter how well you know your business, unless you understand and measure your numbers, you will struggle to grow your business to maximum success. As a business owner you should be reviewing three critical financial reports on a monthly basis:
- Profit & Loss Statement (P&L)
- Balance Sheet
- Cash Flow Statement
These three financial documents will tell the story about your business. When combined, they will paint a powerful picture of how well your business is performing and what areas of your business may need some attention. It is critical that you are reviewing these reports monthly. Are you?
What’s Your Break Event Point?
As a business owner, you need to know the exact point where you actually start making money, otherwise you will run out of money before you produce any profits. A simple break-even analysis tool helps a business owner understand their month-to-month and cash “in” equals cash “out” breakeven points. These points need to be hit before cash runs out, and managing to those points is critical.
Yes, You Do Need a Budget!
It makes no difference how big or small your business is - every business needs to have a budget, even if it is a very basic one. Developing and managing a budget forces you to have an understanding of both sales projections and expenses in your business. It helps business owners put their goals into an actionable format and takes the guesswork out of managing the business. If you are going to develop a budget, you will need to:
- Develop a sales forecast based on last year’s sales, by year and by quarter, using current economic and market trends, sales and marketing plans and any anticipated key events.
- Split out fixed and variable expenses from the previous year on a monthly basis. This may already be done by your accountant, especially if you are using a computerized accounting system.
- Variable costs are those costs directly connected with the delivery of the product or service your company provides to the customer. Depending on the type of business, direct costs may include: direct labor wages, benefits attached to direct labor wages, material costs, commission paid to salespeople, freight, and cost of subcontractors.
- Fixed costs are those costs incurred independent of the sale of your product or service. Example of fixed costs include: rent, insurance, utilities, wages for executive and office staff, sales and marketing expense (including base salaries of salespeople), maintenance auto expense, office supplies, leases for office equipment, etc.
You business budget should be developed for the entire year and then broken out by the month. Once you have the budget in place, you should be reviewing it against actual numbers on a monthly basis.
Manage Your Cash Flow
Cash flow planning includes forecasting and tabulating cash inflow relating to sales, new loans, interest received from financing activities and then analyzing in detail the timing of expected payments to suppliers, wages, loan repayments, tax payments, etc.
By using some simple software and input from a good CPA, most business owners develop some basic cash flow forecasting assumptions and produce reports that will provide some good overviews of cash flow needs for the next week, next month and next quarter. Remember, however, that those projections rely on good forecasts.
Listed below are some dangers to avoid when developing initial cash flow forecast:
- Overstating sales forecasts
- Not accurately predicting costs
- Not understanding debtors trends and performance
- Making overly optimistic assumptions regarding loans and credit availability
Once cash flow projections have been prepared, they should be reviewed and updated quarterly and on-going cash flow management should become a daily management task.
Being successful in business means knowing your business. How can you know who is winning if you do not know the score? You must be looking at your scorecard on a regular basis and using your scorecard to help you make great decisions in your business. Now that you have some basic tools, let’s get into ACTION!