Knowing how to understand and manage your financials is one of the most vital yet drastically under regarded keys for the success of small businesses. It goes without saying that running a small business inherently involves a great deal of risk, what if you could plan for and mitigate a portion of that risk? This is where having a good understanding and knowledge of your financial position comes in. Not to mention being able to rattle of margins and metrics on the fly helps others to feel confident in your business know-how and performance.

1.       Know your present and future cash position

The phrase “cash is king” is likely something you have heard before, but why is cashflow management so important? Firstly, cash flow means being able to meet your financial responsibilities, loan payments, payments to suppliers and even internal payments such as paying your employees and contractors. Failing to meet these responsibilities causes stakeholders to question your viability as a business which can have drastic consequences including increased fees or even lead to loss of vendors or business financing.

Cash flow management can help you track the inflows and outflows of cash in your business and help you plan for and manage situations when cash may be tight. Have a large amount of cash flowing out of the business in June? Not a problem, if you are aware of it now you can plan on and manage that situation. A few things you could do now include:

  • providing discounts to customers that pay earlier
  • introducing late fees for vendors that pay late
  • obtaining a line of credit to assist in meeting your responsibilities

Recognising the issue before it arises is vital. The above solutions will not be helpful if you wait until the very last moment to act.

2.       Know your Profit & Loss

Too many business owners simply do not have a well maintained monthly income statement (profit and loss statement). The income statement or Profit and Loss when used correctly can tell you how profitable your business is and steps that can be taken to increase profitability. Worth knowing about, right? Investors will also use your income statement to asses the level of risk involved in extending credit or venture capital your way.

3.       Know your Margin

A businesses gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods or services it sells. Eg. A gross margin of 55% says your business obtains 55 cents per dollar of revenue you earn after accounting for direct costs.

Companies use gross margin to measure how their costs to produce a good or service relate to the revenue they receive for that good or service. Your Margin has many uses and can tell you a lot about business performance including:

  1. The need to introduce efficiencies or increase prices.
  2. Forecasting costs to be directed towards operating expenses
  3. Comparison to other firms

If your still with me I assume you have a good knowledge on the above items. Congratulations! You are setting yourself up for success in the long term. If on the other hand you are feeling lost or just generally feel that you need a little bit more help that’s ok too. Not all CEO’s have to be financial experts, but it’s a good idea to have someone on your team that is. If you are interested in decreasing your financial risk and getting clear on your company performance contact us to schedule a free strategy session and tick one more thing of your business owner to do list.