Understanding finance is a fundamental requirement for success in business. However excellent your product or service, and however effective your marketing, you have to have a grip on the numbers. After all, if you can’t tell whether you have made a profit this month, then you just don’t know what is going on.
And you need to know which numbers are important. Just as on Dragon’s Den, I often hear business owners stuck when asked the most basic of questions about the performance of their business. Even when they can pluck numbers out of the air, on closer, inspection the reality is often very different (and usually considerably less optimistic). If you don’t know the real numbers then your business is very likely to be in trouble. If you are growing fast, then you could be in big trouble. Growing businesses tend to run out of cash very quickly if no one is managing the costs.
So what do you need to understand? Firstly, the basic profit and loss figures for your business. You need to know how much you are selling – your turnover; your direct costs – what you have to purchase to make what you then sell; and the administrative expenses – staff, stationery, marketing and so on. Turnover minus direct costs leaves your gross profit. Take administrative expenses away from this and you are left with your net profit. And that is what provides you with your own money to spend as you wish.
You should make sure these figures are available to you every month, as soon as possible after the month ends. If you only know your financial situation when your accounts are completed for your tax return at the end of your financial year, it’s far too late to make any alteration to the way you run your business. You will only find out what you need to know in order to change things when it’s too late to do anything! It takes no more effort to get the financial information every month than it does at the year-end – just a little more organisation.
In addition to a profit and loss account, your business accounts have a balance sheet. This is a snapshot of the businesses assets and liabilities at a particular moment in time. For small businesses, this is maybe not so crucial to the day-to-day running of the business but you should always be aware of what you owe who owes you what and for how long. Without that, you cannot chase your debts and you will lose significant amounts of income if you delay to chase those who owe you money.
Most crucially, you need to be aware of your cash-flow. More businesses fail from lack of cash than for any other reason, even when they are profitable. If you can’t pay your rent because you have spent too much, then you are in trouble however profitable you are. You must collect cash promptly and take swift action when customers delay payment.
So make sure you know the numbers in your business. There is no excuse for not doing so. Do some research on the Web, buy a book, go on a course or talk to your accountant. Even if you employ someone else to crunch the numbers for you, understanding the numbers is your responsibility! Make sure you review them regularly (and at least monthly) so you can make any necessary changes to your costs or procedures. You just can’t run a successful business without attention to your finances.