The Number 4 Reason Why Businesses fail is:
Poor Financial Control, Including Lack of Records
You should know at ANY given time the financials of your business. You cannot make informed decisions about your business without financial control and simple bookkeeping.
will take about 8 minutes to read….
Not managing finances effectively is one of the most common mistakes new business owners make.
The following tips & guidelines will ensure you have good financial control over your business.
Get A Bookkeeper
Get a good bookkeeper & accountant– the best investment to be made where your finances are concerned. Together you will gain control of your business and be able to make informed decisions. Ensure you meet regularly as it will allow you to raise any red flags in your business earlier rather than later. Your bookkeeper and accountant form one of the most important parts of your team and should not be overlooked. Even if you are a solopreneur, this part of your business needs to be outsourced to the experts.
Accounting Software
Ensure you are using accounting software. Your bookkeeper and accountant will be the main users of this. As mentioned previously, some great accounting software is MYOB, Xero, Quickbooks. Your accountant and bookkeeper should let you know which one is best suited for your business size and model. I personally didn’t touch one in 15 years. I employed the experts to do this. You are not expected to know everything, but understanding this and delegating is part of being a successful business owner – and a responsible one at that!
Always remember, that you require financial statements and bookkeeping records, if you are ever seeking to obtain a business loan or an overdraft facility or even selling your business. In fact when I took out a personal mortgage for my home, it was the business financial statements that I had to produce together with any personal tax returns. And whilst we are on the topic, don’t disadvantage yourself by not declaring all your earnings. You may illegally save a quick buck by not paying tax but you would have lost the capability of borrowing that extra 50K you so desperately need for your loan.
In fact, you may very well disadvantage yourself when you come to sell your business. The lower you are declaring that you make, the less you are worth!
Pricing
Know your pricing! Pricing is not as straight forward as “I buy for $10 & I sell for $25 therefore I make $15. You have expenses and overheads to factor in.
You cannot price your product if you don’t know how much it costs.
Terminology
Learn basic terminology to understand your business. Don’t be scared to talk the business language.
Terms such as Revenue, Gross Profit and Net Profit, (COGS) cost of goods and operating expenses.
Revenue:
This is the total income your company/business has generated.
Cost of Goods: Costs of materials and labour for manufactured goods or cost of goods that were purchased and then sold.
Gross Profit: Revenue – Cost of Goods = Gross Profit
Operating Expenses: Understand your operating expenses and non operating expenses. The non operating expenses are generally unexpected or irregular expenses.
The operational expenses are generally administrative costs, rent, office supplies, insurances & even your salary. Breaking down your overheads further into general & administrative expenses or occupancy costs has significant importance.
Net Profit: Also known as the “bottom line”. This is what is left after all your expenses and taxes have been paid.
EBITDA: A widely used financial metric which is short for earnings before interest, tax, depreciation and amortization.
Managing Your Revenue
Understanding that your revenue is NOT your profit is critical – the amount of people that fall into trouble, simply because they think that what they bank, is theirs, is staggering.
Split your daily revenue into pieces and allocate only the net profit to yourself. Set everything else aside so you have control over what is yours and what is not yours. Let’s say for example you know that your net profit margin is 20%. Your daily sales are coming in at $1000 per day. Set aside $800 and know that this amount is there to cover your costs and expenses. Even in a minus/plus situation, you will be in a better position as opposed to not doing this at all.
Set aside funds for payments that come every quarter or annually. (This will assist your “cash flow forecast” we spoke about.) Understand and know what they are, record them and put them in a hidden bank account (as mentioned previously) and forget about them. Some of these include:
- BAS Statements (including GST Payments)
- TAX Money
- Superannuation
- Annual Rates
- Workcover
- Staff accrued entitlements
Managing Your Bills
Pay your bills on time and avoid penalties and fines.
Pay Yourself a Salary
Rather than just taking the profits, pay yourself a salary. This worked well for me as I was able to separate business finances from personal ones. Don’t mix business and personal finances. Ensure you pay yourself superannuation as well. If you can, throw in some extra at the end of the financial year. Consult your accountant on both your salary and superannuation payments.
I chipped away at this throughout all my years and consulted with my accountant every year about how much extra to throw into that kitty that would be beneficial both from a tax and growth perspective. I used most of it as a deposit on the business premises in 2014 and loaned the rest from the bank. I doubled my investment in just a few years’ time and through that, secured my retirement.
Keep Assessing Your Expenses
Keep assessing your expenses and contracts and cut any non-essential ones or re negotiate them. It’s easy to subscribe to something that you need and forget to unsubscribe when you don’t need it. These all add up. Recurring subscriptions are a trap. Switch them off! Re negotiate deals with service providers and suppliers. Don’t lock yourself in to lifetime rates with anyone. Everything can be negotiated.
Customer Relationship Management (CRM)
Keep records through your customer CRM of your returns and exchanges. You must account for these with realistic numbers. Compare them to benchmarks and see how you are travelling. Its easy to get caught up in seeing 30 parcels return per day and think that you are doing bad. Put things into perspective and don’t try and fix something that’s not broken. There is absolutely room for improvement in every aspect, but you must have correct data to make informed decisions – not a staff member complaining that they’re seeing too many exchanges and returns.
Poor Financial Control including lack of records is the number four (out of the top four) reasons why businesses fail.
Let’s check out the other reasons why businesses fail & see more information on each:
It’s essential to understand these four reasons as they have critical information to the success of your Finances and Strategic Management which is one of the most important steps in the 5 basic step guide to running a successful business.
