Managing a business isn’t easy and if you don’t know much about finance, it’s a sure-fire way of running into trouble.
The first thing any entrepreneur or manager has to learn is how to understand some basic finances. Once you learn the basics, it is critical to add to your knowledge over time.
In keeping an eye on the business, there are 3 key areas to look.
It’s obvious but without it you go bust pretty soon. You must monitor your cash flow., daily weekly and monthly. Having a positive bank balance ensures the future of the business and looking at cash flow projections is key in making sure any hidden problems are resolved quickly. Make sure you’re customers pay their bills on time and don’t let a large customer delay payments. There is not much you can delay in paying your outgoing costs if most of these are staff salaries. See my tips on managing cash.
Looking at a monthly profit and loss account isn’t enough, although this is important. It is more important know how much profit you make on each product or service you sell. Without this knowledge, the business cannot improve its profitability. Products/services should be ranked by gross profitability margin, i.e. sales less the direct costs divided by sales as a percentage. Watch out how these trend over time as well since director costs can creep up too.
Keep an eye on your costs, especially the overheads since these can creep up and each time they do, it means you have to produce more profits to cover them. Overheads or fixed costs are the usual running costs to maintain a business, such as the staff salaries, office costs, rents and rates. Overhead costs should be monitored as a percentage of total sales and as an absolute number. Over time if your sales are growing rapidly, the overhead cost margin will reduce but by keeping an eye on the absolute number and how it increases will help keep control over overheads.
Monitoring KPIs’ are essential in any business but as a quick control, keeping an eye on the 3 key areas above on a timely basis will help you understand how the business is doing.