Business financials can be a meaty topic – it can get a bit overwhelming and jargon is rife – so the best place to start when tackling this topic is at the very beginning. I like to call it solid financial foundations.
I get it. Sometimes it’s hard to see through the fog of running a business. There are client emails to reply to, bills to pay, stock to order. But if you take 5 minutes to master the basics, it might just save you hours later down the track – and you’ll move from being “not sure” about your finances, to “nailing it” in no time.
Usually the story goes something like this – you come up with a great idea or product. You make your product, set up a business, a website and work out how to sell your product. Then what? Oh yeah, you have to pay tax so you get that sorted with the tax accountant. The business starts to grow – money in, money out, all at different times of the month, quarter and year. It all feels a bit hectic really, but you’re working it out as you go.
And then you start comparing. You notice that business owner A seems to be coping okay, and business owner B also seems to have stuff sorted, but you just feel overwhelmed. So, what do they know that you don’t?
BACK TO BASICS
The answer is simple, but maybe not as exciting as you think. There is no small army of financial wizards in the background doing the work for them, but they do have a bag of tricks to rely on that can take the pressure off.
It’s about getting the basics right – so here are my essentials for nailing your business financials (you’re welcome 😉 ).
1. Bank account set up
This is essential. You might need three or more – one for everyday business stuff, one for bills looming on the horizon (anything due further than a month out), and one for the tax man. Split that cash up each week or month and forget about it.
2. Terms of sale
It’s important to keep your terms of sale tight. If you don’t get paid immediately for your product or service, what’s your process and turnaround for receiving payment? Do you send an invoice and receive the money 30 days later? Can you change your terms to payment within 7 days? Can you set up e-commerce on your website and get paid immediately? Are you getting paid in a timely, systemised manner? No? Then change it up. Who wants to wait to receive money they’ve already earned? Not me!
3. Bookkeeping systems and processes
Depending on your business, you may or may not need a full-on, cloud, sky-high, super-dooper bookkeeping system. If you have lots of transactions, investigate a bookkeeping system or bookkeeper. If that’s not the case, work out a manual process (i.e. a fancy folder with plastic sleeves or an in-tray) and file those receipts in order ready to review each month. And remember to add up your expenses at least monthly!
4. The Golden Profit Equation
Business owners who feel clear and calm about their financials – well, that’s because they know exactly what they’re income and expenses are each month. And that’s the golden equation in business financials – what does income minus expenses equal? Profit of course! OK, this is a simplified profit calculation (and when I say simplified, I mean simplified) – there are many different exceptions to this rule for tax purposes and cash flow purposes but it’s a good starting point. Look at your figures monthly – sure, the first few times might feel overwhelming but believe me, once you do this a few times it will start to provide clarity.
5. The Big Picture
Let’s fast forward. You’ve set up your bank accounts and money is going where it needs to be weekly or monthly and you’re being paid in record time. You’re filing away receipts on autopilot or tracking it in a bookkeeping system and looking at you profit each month. It’s then time to take a step back and see the whole picture. These simple systems are providing a framework for a solid financial foundation for your business. They all lead to the same place, which is financial clarity.
CLARITY IS KEY
Overwhelm and confusion struggle to co-exist where there is clarity and understanding. Why? Because clarity provides you with the opportunity to make better, well-informed business decisions.
Let your numbers do the talking
- Do you have enough available cash/capital to invest in a new product?
- Are you under-charging due to omitting costs, perhaps overheads or components of a product?
- Expenses seem high last month compared to the level of sales, why was that?
Seeing your financial situation through a clear lens helps business owners move into a position of proactive decision making instead of reactive decisions.
If you don’t like how profit looked that month, make a different business decision. Change your marketing approach, or spend less money on non-essential expenses. Redirect where your attention is being focused.
By taking the time to get the basics right and to look at the big picture, you’ll stop feeling unsure about your financials and be nailing it in no time. Your financials are telling you the story of your business, can you see it?