Good financial management is often the difference between a successful or unsuccessful business. Time after time I have witnessed businesses fail and not understand why purely because they have no grasp on their businesses financial performance and simply run their business on “auto pilot”.
Managing the financial aspects of a business can be likened to driving a car. A car has a dashboard with gauges that allow you to understand the basic health of your car at any point in time, likewise so does a business’s financial health.
A business health gauge comprises of the following:
– Profit & Loss Statement or Statement of Financial Performance
– Balance Sheet or Statement of Financial Position
– Cash Flow Statement
By taking the time to go through these 3 financial statements with your accountant or bookkeeper you will understand whether you run a profitable or unprofitable business in its current form. Some business owners and managers are shocked after they take the time to sit down and look at their business’s financial statements for the first time.
Once you have determined whether your business is profitable or unprofitable you are then able to optimise the performance of your business by examining the fine detail of your financial statements. What must be understood is that one statement on its own will not give you enough detail to determine a business’s viability or future. Only when these statements are looked at in combination can you see the full picture and realise the financial health of your business.
In order to optimise your business’s financial health you need to understand how much money your business is making in sales on a monthly basis or preferably a weekly basis where cash flow needs to managed closely. Now let’s differentiate between sales and cash in the bank sales as this can be very misleading. By looking simply at the sales line of your Profit & Loss and being quite pleased with yourself as business is looking good, you need to realise that often depending on your business model and industry the sales on your profit and loss statement for the month will not be realised for some time to come as these sales have been made on credit and are not cash sales. As such you are going to have a gap in time between writing the sale and receiving the money. Now this doesn’t help you because you still have a business to run, and you are probably going to run up bills in this time. This is when you can take a look at your cash flow statement and find out how much money in sales is actually coming in on a monthly or weekly basis so you know how much money you have to play with.
Next let’s take a look at the expenditure of the business. This is often where the business falls down from a managerial perspective as people do not keep a tight rein of the expenses. Now you know about the sales on the profit and loss statement the expenses are very similar in nature. Once again depending on your business model and industry the expenses displayed on your profit and Loss may consist of purchases made on credit as a majority. This means that the majority of your expenses may not be due for a time frame anywhere from 7 days onwards. As such the majority of expenses displayed on last month’s profit and loss statement will be paid in the current month. Expenses can vary month to month also so by looking at the profit and loss statement you will not gain an understanding of where the business’s money is going. Once again you need to look at cash flow statement to gain an understanding of what your regular outgoings are. It is also important to look at the current liabilities section of your balance sheet to realise what the business needs to pay in the near future.
Having a budget or a business projection is a very important tool for a manager or business owner as you can determine the direction your business is going before it gets to its destination and if you don’t like the destination the business is headed you still have time to change course.
We enjoy working with and helping our clients understand their businesses at Darcy Bookkeeping & Business Services. We are bookkeeping and accounting services specialists working with clients in Brisbane and the Sunshine coast. If you need help understanding the financial cogs of your business call us on 1300 728 875 or visit our website at www.darcyservices.com.au.