20 Jul How well do you really know your numbers?
Something that should be done as both a habit and a part of your business planning process, is budgeting and forecasting. Not just looking at the money coming in and going out each month, but really getting to know your numbers inside out.
Financials are a clear indicator of whether or not your business is working as you would like, not just in terms of profitability, but also to see if you are on course to achieve personal goals, such as earning more disposable income each month or getting closer to taking on a mortgage for your dream house.
Your numbers can act as ‘truth tellers’ providing you with a valuable insight, a dashboard if you like, that gives an overview of the health of your business.
Profit and cashflow
There is a perception that profit equals success – which it does – but don’t underestimate the importance of good cash flow management too.
Around 80% of small businesses fail because of bad cash flow. Having enough cash in the bank to pay bills and staff is vital. Relying on credit cards, overdrafts or incurring late payment fees as you wait for money to land in your account can end up costing you money in interest.
This is where forecasting can really help. Knowing what money you have coming in and going out of your account each month – and when – can enable you make informed decisions and predict when you will have enough money in your accounts to invest in things like new equipment or recruitment.
Even profitable businesses fail when they can’t manage cash flow effectively or get a proper grasp on their numbers.
Knowing when cash flows in and out of your business can make it much easier to notice trends. When are your busy periods? Do you have any seasonal fluctuations? Do you have any annual bills to pay, such as memberships or subscriptions?
Knowing these things can also help you to set – and stick to – budgets. If, for example, you know things tend to be quieter during summer months, you can increase your marketing budget in spring to create a pipeline of leads, or pay to hold an exhibition stand at an event. Or you could create a spending budget/limit in place to make sure you have a surplus in your account to see you through quieter periods.
If you are a sole entrepreneur, owner-managed business or freelancer, you also need to consider your personal budgets. What is the minimum amount you need to earn each month to pay your own personal bills? Consider setting a personal budget as a well as budgets within your business. Paying yourself more or less than budgeted each month can be a good indicator of your business’ performance.
Aim to build up a financial reserve, ideally an amount equal to six months of business and personal costs/bills, to take the pressure off.
Forecasting the future
Not everyone has a head for numbers. Chances are you started a business because you have a particular passion or skill and, suddenly, you have to learn about balance sheets and profit and loss reports. But they are important and the only truly accurate way of measuring the success of your business.
Knowing your numbers can also help to shape your decision-making and plan for your future. Use them to not only look at the ‘here and now’ but to forecast the future and then measure any variance, as this will increase your foresight and agility.
Consider sharing your numbers with someone you trust, such as a partner, business coach or mentor. They can offer impartial advice and the benefit of their experience. It will also help to hold you accountable to achieving your financial targets and realising your future business plans, such as a new office or larger team.
The more you track your numbers, the more you will grow – not just in terms of profit and turnover, but also in confidence.
We offer several free resources to help you develop your business. We can also be a trusted partner, supporting you with a wide range of services from business planning and forecasting to bookkeeping and expense management.
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