FINANCIAL MANAGEMENT OF A BUSINESS
Statistics show that 90% of businesses fail within 10 years. If you've been in business for 10 years you probably don't have to read any further!
The reason for an overwhelming majority of business failures is faulty financial management. This includes “no financial management”. If you run your business by ‘gut feel' alone you are cruising for a bruising. Unless you are a financial genius, it is statically proven that it is rarely possible to stay in business running on ‘gut feel' alone.
Let's talk about financial management. Firstly, what is financial management? Some will say it's “ having enough cash to pay your bills ” and others say it's about “ making a profit ”. Both are equally as important. Cash can only come from profits and profits can only come from cash . It is easier than you might think to be making a profit… but not have any cash. For example, you can get so involved in selling and making stuff that you forget to invoice on time and collect debts quickly enough. Suppliers will surely remind you of your obligation to pay them but customers will never remind you to send them an invoice. You need a systematic approach to debt collection and invoicing .
However, before you think about invoicing and debt collection, you need to be sure that what you are selling is priced right . There is no point in selling stuff at a loss in the long term.
How do you ensure what you are selling is priced right? The first thing you need to do in business is to know what it's going to cost to run the business and therefore how much you need to sell to break even . Many businesses go horribly wrong, by plucking a figure out of the air as a sales price and hoping they sell enough to cover costs. This may work for a short while but will cause business death in the long run.
Selling more at the wrong price and without good financial controls in place can be a deadly business. Often when you sell something you don't get paid immediately, so that the more you sell the more cash you need to cover the increased costs until you get paid for the sale. In accounting terms this is called the Financial Gap . While you are making increased sales, your overheads are also increasing, and if you don't get paid immediately you could find yourself in an unexpected cashflow crisis. So, before you embark on a business growth plan it is essential to also incorporate a funding plan to ensure your growth is sustainable and viable.
A vital part of any growth plan must be a budget . A budget is a prediction of what you believe is achievable in terms of sales and expenses for a future period (usually the financial year). A budget is important because it helps you work to a plan. Budget figures can be entered into most accounting systems and printed on a Profit and Loss Report so that comparison can be made to measure how the business is shaping up to the plan.
If we can assist further, please email TotalAccounting as follows:
CONTACT TOTALACCOUNTING BY EMAIL BY CLICKING ON THIS LINK
BACK TO KNOWLEDGE AND INFORMATION CENTRE HOME PAGE