Numbers, Finances, Revenue, Costs, P&L… alright, I’ve finished. You can stop snoozing now!
I know business finances are not the most riveting topic in the world, but it is really important to at least understand the basics. Knowing your numbers can give you a clear picture of what is going on in your business. Once you know that, you can plan for growth, obtain assets, or improve cash flow.
Let’s look at those numbers now…
5 Key Principles Of Business Finances
There are 5 key things that you need to understand about your business finances. They are…
1: Revenue and Expenses
This is the money that comes into your business and the stuff that goes out too. Your revenue is everything that you invoice out or earn an income from. Your expenses are all of your business costs. When you take the expenses away from the revenue, you are left with your profit.
For your business to be a success, your ongoing revenue needs to be higher than your expenses, otherwise you will always operate at a loss. That is the absolute basic level of creating a profit for your business.
2: Tracking Revenue and Expenses
Knowing what these terms mean and tracking them are two completely different things. It is really important to keep up to date on how your business is tracking on a regular basis. Burying your head in the sand is never a good tactic when it comes to finances!
If you use an accounting system like Xero then all of your revenue and expenses will be tracked in your Profit and Loss Report (P&L). This is a great way to examine the areas of your business that are making you the most money, and the places that are costing you. You should do more of the things that bring in the money to up your revenue, and try to minimise the areas of high cost to increase your profit.
3: Return On Investment
If you are going to be investing in anything, you want to see a decent return on that investment. For example, if you are choosing to invest in advertising, ensure that it is a method that will allow you to track engagement. You want to know how many people saw your advertisement, if it resonated with them, and did it interest them to engage. With print media it is really hard to track these things, but with online methods you get access to the analytics of a campaign. That makes it easier to assess if it was money well spent.
Don’t forget that time is also a currency. Your time is worth just as much as the dollars in the bank, so make sure you spend it wisely. Sometimes it can be a more cost effective option to outsource tasks that you find boring and time consuming, rather than trying to muddle through them yourself.
There is a reason the saying is ‘Cashflow is King’. Without a regular supply of money into your business you will struggle to pay your bills and to pay your own wages. It is important to have systems in place to keep the cash flowing in.
To ensure good cashflow you need to…
- Keep on top of your invoicing by sending them out as soon as you are able
- For large projects, break the payments down into milestones like a deposit, 50% completion and final delivery so you aren’t waiting for the end of the project for all of your money
- Set up automated invoice reminders in your accounting system so that you don’t have to send manual ones
- Chase any debt that is outstanding, often people have simply forgotten your invoice and a gentle reminder will get payment in your account
- Pick up the phone and call people if they don’t pay after a gentle reminder – a phone call is harder to ignore than an email.
- Involve a collection agency if the debt remains outstanding after too long
5: Budgeting and Forecasting
If you are serious about growing your business then you need to have a budget. Note down your expected monthly income and the costs you expect to pop up. Once you have the concrete figures, then plan for a buffer in case something unexpected pops up. Forecast what you think might be coming up on the horizon in terms of big projects you could win and any investments you need to make.
Once you have all of that information down, you can get a clear picture of where your business is right now and what you need to do to get it to the place you want to be in. By budgeting, you will have a clear picture of what spare funds you have to play with and can then decide where best to spend them.
You don’t need to be a financial expert to understand your business finances. Chances are, you will have an accountant or a bookkeeper to do your high level accounting. But you do need to have a basic understanding of how the numbers fit together so that you can identify areas of weakness and growth within your business.