Money management matters
The first few years for any new business are crucial to its long-term success, with many challenges to overcome and lessons to be learned.
Cashflow problems and mismanaged finances are major causes of business failure in the early years. Some companies fail to plan properly, some set their sights too high or low, some don't keep track of costs, some fail to chase payment.
You can maximize your chances of business success by being aware of the pitfalls. Then you can manage your company's finances carefully and keep a close eye on its cashflow.
Taking sensible, practical steps will help you control spending and grow your business without taking excessive financial risks. Here are some useful tips to consider.
Use financial planning and forecasting
It's useful to develop a financial plan or framework to keep track of finances coming into and out of your company. For example, one model for your business might be to spend:
50 percent of revenue on expenses (such as payroll or supplies).
30 percent of revenue on building the business (such as expansion of equipment or recruiting costs).
20 percent of revenue on the future, for developing new products and services.
Different plans work for different businesses, but circumstances change. When they do, your financial plan should change too. Try to conduct some simple forecasting of your business for at least the next six months. Be realistic and try to estimate how much you will sell and how much you will spend. Plug these numbers into your financial plan and see if the results will still work for your business. If not, you may need to change your plan.
Be ambitious but stay realistic
Ambition and enthusiasm are important characteristics of business owners and managers. But so is the ability to make rational financial decisions based on the facts. When you start a new business the feeling of control can be exhilarating. Free from the constraints of employment, you can make any financial decision you want to. Some of those decisions will be good. Others won't.
Like any other area of life, learning to run a business comes through experimentation, successes and occasional mistakes. The mistakes are important – if you read any successful entrepreneur's autobiography or biography, mistakes will feature highly.
But successful entrepreneurs have two things in common – they learn from their mistakes, and they make small enough mistakes that they are able to recover from them financially.
This is a pragmatic approach to doing business. Few large companies became large overnight. They grew over a period of time, with setbacks along the way. Taking the occasional risk is part of good business. Taking unnecessarily big risks is not.
Chart your cashflow
Good accounting software can create charts of inflows (sales of goods or services) and outflows (accounts payable) for your business. It will let you change the time period and other variables so you can really understand what's happening. If you look at these charts over a period of weeks and months, you'll get an idea of the rates of flow of money into and out of your business.
Obviously you need the inflows to be greater than the outflows to make a profit. But the size of the difference is what's important. It will vary over time because few businesses make a consistent profit day in, day out. Some months or weeks will be good, some not so good. Looking at the charts will help you see the pattern as these values change.
Is the difference between income and expenditure often small? Does it sometimes dip into negative territory? Those are periods when your business is potentially at risk of cashflow problems. Try to find out what's causing this to happen at specific times. You can then attempt to restructure some aspects of your business to avoid the dips.
Review expenses regularly
It's important to keep a close eye on your business expenditure. Good accounting software will let you quickly draw up useful reports, such as:
Profit and loss reports These show your company’s income, expenses and profits over time.
Balance sheet reports These show assets, liabilities and net equities.
Statement of cash flows reports These show the cash flowing in and out of a business.
Accounts payable and accounts receivable reports These show how much money is owed by, and to, your company.
Depreciation reports These give you a breakdown of the value of the assets owned by your company.
Keep an eye on your payroll too, even if you outsource some of it. For a growing company, this is often more complex than anticipated
Review all of these regularly, preferably with the help of your accountant or financial advisor, who can act as a sounding board.
Put financial management at the heart of your business
Managing your finances and cashflow shouldn't be an afterthought. It should be a fundamental part of your business strategy.
To be a successful entrepreneur you must thoroughly understand the numbers that drive your business. That will give you the knowledge you need to keep your company running, and help it to grow when the time is right.
Good accounting software will make it easy for you to plan, forecast, chart and chase your company's money. But even with that support, only you can steer your business in the right direction.