Whether you go into business because you want to be your own boss or because you want to earn a lot of money or both, there is some important financial know how that will help you to keep track of how your business is performing. This is vital if you are to stay on top of both day-to-day operations and longer-term planning. Consider these seven areas and ask yourself if you’re confident about your knowledge of each one. If so, you’re doing all the right things to head for success. If not, help your business and yourself by getting up to speed as fast as you can.
Here are the essential financial elements for any business owner:
- Familiarity with cash flow.
- Sales monitoring.
- Knowledge of net income.
- Understanding profit and loss.
- Balancing price point and gross profit.
- Ability to track inventory.
This is the “quick read” version of how your business is performing.Total the amount of money that your business is generating from sales and deduct your operating expenses. Remember to include items such as depreciation and adjustments for working capital when you do this. Ideally, your inflow of cash will be greater than your outflow. If it isn’t, this is an early warning and should prompt you to look more closely at expenses versus income.
If you’ve heard of a business having “temporary cash flow problems”, you’ll understand that there are issues around expenditure exceeding income that can have very uncomfortable, not to say serious, implications and consequences. Opt for a good invoicing system that uses a professional invoice template to ensure that your invoices are generated promptly as soon as work is completed and that your terms are clearly stated. Late payment can be a problem for small business owners as this is one of the things that adversely affects their cashflow.
A good, efficient invoicing system will also help you to monitor sales on a regular basis. Think of it as collecting lots of data and then drilling down to completely understand what it is telling you. Look out for both highs and lows, and aim to understand why they are happening, at the time they are happening. Your reactions in each case could help you to promote growth or stem decline, depending on the circumstances.
Unlike cash flow, calculating net income doesn’t take account of working capital or depreciation. It’s simply deducting expenses, including any taxes due, from your income. This provides another good and accurate indicator of how your business is performing financially. Together with cash flow, it should present a clear picture of the business finances.
Profit and loss
If cash flow is a “quick read”, then profit and loss is a snapshot – literally an assessment of business performance at a specific point in time. The P&L statement may be prepared quarterly, six-monthly, or annually. Once again, the business income is offset against expenses. As you examine profit and loss over several time periods, your ability to plan for the future is improved.
Price point and gross profit
This calculation is something of a test of how well you really know your business. To determine price point, you need to add together the actual cost of purchasing your goods and all the other overheads required for you to provide them to your customers. Make sure that your overheads include payroll costs and utilities as well as sales taxes. With this information, you can determine price point, or the level at which you should charge customers in order to make a profit. If you get it wrong, you may find that you’re underselling your products or services.
Gross profit is related in that it tells you how much money is left over when you subtract the actual costs from your income at the selling price.
Weekly tracking of inventory numbers will help you to avoid any gradual increases, which are sometimes a sign of problems ahead. Remember that if you have too much inventory, you might suffer extra storage costs, which could reduce your profits and, in certain businesses such as restaurants, lead to waste.
Peace of mind
These are the essential financial elements to consider when you’re going into business for yourself. If you’re already running a business, make sure that you’re keeping an eye on these crucial financial numbers, and if something’s slipped through the net, put it right as soon as you can. Your business will feel the benefit, and you will be confident that you’re fully in control.