Author: Tanya Titman, Managing Director Date Posted: 2 April 2015
Statistics show 8 out of 10 business fail within the first 18 months. Only 50 percent survive to the four or five year mark. Tanya Titman, business turnaround specialist, reveals the foundation to business success - financial literacy.
Understand your business finances
Many business owners operate with limited or no understanding of their businesses finances. They make major decisions based on how much money is in their bank account, rather than an understanding of their true financial position.
Most entrepreneurs and business owners don't have an accounting degree. What they do have is amazing ideas and passion for their business. However, without a full understanding of your financial position, it is easy to make bad financial decisions which can send your business broke.
Overcoming your 'fear of the financials' is easy. Start looking at your financial reports (i.e. Profit and Loss Statement AND Balance Sheet) every month and ask lots of questions. Empower yourself. Find out how to run your own reports rather than relying on someone else. Stop running your business by the bank account and start taking control of your financial position.
Understand where your profit went
Your profit is outlined in a Profit & Loss Statement, it is not the amount left in your bank account at the end of the year. A P&L shows how your business performed. Your Balance Sheet shows where the profit went. By reviewing the difference between last year's figures and this year's figures on your Balance Sheet you will have a good idea of where your profit is hiding.
Understand your financial reports
If you don't know how to read a Profit and Loss Statement and Balance Sheet then find a great accountant who can explain it to you! Set a budget and lock in time with your accountant to review your results every month. Being accountable to someone you trust is critical to achieving financial success.
Manage your cashflow
Cashflow (or lack of it) is a constant challenge for all business owners. 'Cash' is the oxygen a business needs to survive day to day. By predicting when you might start to struggle with cash you can put strategies in place to ensure your business has enough money to keep going. Forecast 12 weeks in advance by listing all the income you expect to receive each week, all the business' payment commitments and when they fall due (payroll, direct debits etc.). Quite quickly you will see when you might need a cash injection.
Understand your pricing strategy
Often business owners think they need more customers to make more money. This is not always true. The biggest impact on your businesses profitability is made by getting your pricing strategy right. If you set prices based on a 'gut feel' or industry trend, then you are most likely giving away your profit. Have you factored all the costs related to selling your goods or services? Get a trusted advisor to review your pricing strategy and revisit your prices regularly.
Understand your business capacity.
How much revenue can you generate with your current resources? Who to recruit and when to do so are critical decisions. Often the business owner start by increasing their sales team. This generally means the business owner ends up doing the admin work. Write a list of all the tasks you do on a daily basis and categorise them. Consider what can be delegated or outsourced. This can often be the key to unlocking revenue and building your business capacity.
Don't run your business by the bank account!
Your bank account is not an indicator of your profit position. It is dangerous to base business decisions on whether you have money in the bank or not.
A business owner who understands their financial position is able to make informed decisions. Understanding your finances is truly the foundation to business success.