What story do the numbers tell? (Finance, Part 1/5)
Many business owners do not like dealing with the financial side of their business or just simply think it’s too complicated to understand. They would much rather get on with what they are good at and leave the finances to someone else. Providing there is enough to pay themselves, they are happy. But this is a missed opportunity. The numbers behind a business, tell a story. That story might range from a tragedy, to an exciting roller coaster with ups and downs. Some stories are more popular than others. Probably the most popular story business owners want to hear is, one without surprises or stress and increasing rewards. So which chapters of the financial story should they be most interested in?
There are four chapters in financial management which stand out for small and medium sized businesses:
You will notice that, sales are not included in the list. The reason for this is, that without sales you have not got a business. There is a saying turnover from the sales is vanity, profit is sanity, but cash is king to keep a business going. For the majority of SME’s, getting to grips with the four aspects of financial management will make life less stressful. Without keeping a grip on the four aspects, many owners get a report from their accountant months after the end of their financial year, by which time it’s too late to sort out any issue which has arisen. So, let’s start with the plan or forecast.
Unless someone is getting a loan to start a business they often do not bother with doing a forecast. But without a forecast you cannot compare your actual activities with what you expected, or planned, and as a result an unpleasant surprise at the end of the year is almost inevitable. If you have a forecast of expected sales, out goings for production and for the business administration then it will be easier to compare forecast with actual and act sooner, rather than later, if there are variances of any significance.
Cash is the lifeline of a business. It enables you to pay bills and continue trading. Without it the business will die. The rule applies to everyone, from start-ups to whole countries. Whilst an organisation might have assets they could sell, e.g. a building, if they do not have enough cash to meet their bills then they will fail. Having access to enough cash to meet your immediate needs is vital.
Providing the income is greater than the outgoings then you should make a profit. You should aim for a level of profit that allows the owner to draw more than what they could earn if they were working for someone else. If they are not achieving that level of personal income, it’s not a business, it’s a lifestyle choice. Working out how to achieve a decent profit depends upon a lot of variables. By considering them in turn, every business should make a profit, providing it has a clearly defined offer which there is a demand for.
When a business makes a profit, some is taken by the shareholders, the remainder is retained in the business as a reserve or to be invested in more resources to allow more work to be carried out. Waiting for surplus profits before you invest in new resources to grow is known as “growing organically”. If you are confident the business will grow, and the figures tell the right story, then you can borrow money to speed up the growth rate and repay the loan from the business activities. To obtain a loan at the best rate the risk to the lender needs to be as low as possible. A lender considers low risk business, one that is well run and has a history of being well managed.
In this series of blogs about “Making the numbers tell a good story”, I will consider each of the financial aspects more fully. In the meanwhile, if you would like to reset “what story your numbers tell, you can get in touch with me, for a no obligation review. http://ow.ly/SyPn30j0MUY
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