You start your company with a great idea – not necessarily a financial background.

Posted on August 22, 2011 by

5


***This blog post has been written with the focus on helping small business owners and first time entrepreneurs**

A great idea in one hand and very little money in the other is how most entrepreneurs start out on their entrepreneurial adventure. The successful ones learn very quickly how to be resourceful and find what they need.

During these initial stages you may or may not be able to afford a financial guru or financial anyone to help you understand the financial side of your business. But that doesn’t mean that you don’t need to be watching your finances – the great news is that you don’t need a financial background to master the fundamentals of running a profitable business.  Here are three tips on how to manage your finances:

1. Cash is King – Keep an Eye on your bank account balance

Cash is a good indicator of your operating efficiency. If you have increasing sales but your cash balance is getting lower – it can signal that you have some issues that can affect the solvency of your company. Your customers may be slow paying or your account payable terms are not that favorable (or you may have both issues).  Keeping an eye on your cash figure can give you an early warning of any potential cash flow issues that you may potentially have and hopefully give you some time to prepare and respond to them.

2. Keep an eye on overhead costs

Overhead costs are the costs associated with running or operating your business (a detailed definition can be found at the bottom of the post). These costs can be easily overlooked when you are incredibly focused on increasing your sales.  Ideally, your overhead costs should fluctuate in the same direction as your sales (i.e. your sales increase 30%, your overhead should increase and if your sales decrease 30% -you want your overheads to decrease to compensate for this loss in revenue).

A simple way to keep an eye on your overheads is track (on a monthly basis) your Overhead Percentage of Sales using the following formula:

Overhead % of sales = overhead expenses/sales

Tip: When tracking this %, the number itself does not mean a whole lot – you are looking for any deviations month to month as that may signal some potential issues in relation to sales or expenses. If you see a fluctuation, investigate why and make some changes if necessary.

3. Do you make more than you spend?

Just like your personal finances, your company should be making more than it spends, if it isn’t that means you will need to be contributing extra money (by means of loans, credit cards, personal savings) to make ends meet.  In today’s age, lines of credit can be tough for a first time business owner to acquire – so keeping an eye on your ability to pay expenses is key. Here is a formula you should remember and look at monthly:

(Cash+Line of Credit/Loans)/monthly expenses = number of months till you will need more funds or lose your business.

In an ideal world – you would have adequate financial knowledge when starting a business – but in reality a lot of entrepreneurs don’t. I would strongly encourage all business owners (even if you can afford an accountant) to acquire an adequate level of financial business literacy and learn how to read financial statements.

There are a lot of online articles that provide information on how to read and comprehend your company’s financials these include. You can also take classes at community colleges, colleges and read books on the topic.

Till next time,

Boomer

* Overhead Expense: “In business, overhead, overhead cost or overhead expense refers to an ongoing expense of operating a business (also known as Operating Expenses – rent, gas/electricity, wages etc.). The term overhead is usually used to group expenses that are necessary to the continued functioning of the business but cannot be immediately associated with the products/services being offered[1] (e.g. do not directly generate profits). Closely related accounting concepts are fixed costs versus variable costs and indirect costs versus direct costs.

Overhead expenses are all costs on the income statement except for direct labor, direct materials & direct expenses. Overhead expenses include accounting fees, advertising, depreciation, insurance, interest, legal fees, rent, repairs, supplies, taxes, telephone bills, travel and utilities costs”

http://en.wikipedia.org/wiki/Overhead_(business)

Advertisements