Finance tips for small business owners

SMALL FINANCE TIPS FOR SMALL BUSINESS OWNERS

Making sense of the numbers in your business

I N T R O D U C T I O N

DOES IT ALL ADD UP?

Are you able to make objective factual decisions based on thenumbersthatyouseeinyourbusiness?

Many business owners only look at their financial statementsjustonceayear.Theygostraighttothebottom line to see whether they made a profit or not. But your financial statements contain a wealth of information, and withtherighttools,youcanquicklydeterminehow‘healthy’ yourbusinessis

Knowing your numbers around cash flow, margins, profit and loss and break even points, will give you back tighter control of your financials. It will help you manage your cashflow better to shorten the cash gap and it will give you the knowledge to make informed decisions about your business.

If you smartly examine the numbers within your business, you will be able to interpret these figures for increased sales,rapidgrowthandimprovedprofitability.

But one of the key reasons businesses struggle is because they fail to apply the numbers objectively, and knowledgeably,inthedecisionmakingprocess.

Y O U R B U D G E T

YOUR BUDGET

Abudget issimplyaplanforhowyouwanttoallocateyour money. It's a roadmap for your business finances, and it's essentialforstayingontrack.

When budgeting, you need to look at both your expenses and your revenues Your expenses (or costs) are what you need to pay for to keep your business running, and your revenues (or sales) are the money you make from your sales.

So, what should you budget for as a small business owner? Ideally, you should budget for all of your regular expenses, such as rent, utilities, wages, and stock, as well as any plannedinvestmentsinyourbusiness.

Budget for both the short-term – up to a year, and the long-term – between 1 to 5 years. And It's best to budget regularly, such as monthly or quarterly. This will help you stay on top of your finances and make adjustments as and whenneeded.

Howtobudgeteffectively-agoodstartistogatherall yourexistingfinancialinformation,suchasyourbank statementsandinvoices,andusingthesetocreatea realisticbudgetbasedonthisdata.Makesuretoinclude bothyourexpectedexpensesandrevenuesandadjustyour budgetasyourcircumstanceschange Buildabufferfora fewunexpectedexpensestoo,justincase.

Y O U R C A S H F L O W

YOUR CASHFLOW

Basically,cashflowistheamountofmoneycominginand going out of your business. It's the lifeblood of your business,andit'scrucialtokeepithealthy

Thecashinflowsarethemoneycomingintoyourbusiness, basically sales, and your cash outflows are the money goingoutofyourbusinessoryourexpenses.

To effectively manage your cash flow, you need to look at both the inflows and outflows and make sure the money cominginisgreaterthanthemoneygoingout.

Whatyoushouldbeworkingtowardsisapositivecashflow where you have enough money coming in to cover your expenses,makeinvestments,andgrowyourbusiness

Given how critical healthy cash flow is for a sustainable business,it’simportantthatitismanagedeffectively.

Howtobettermanageyourcashflow-

First,it'simportanttotrackyourcashflowregularly.Thiswill giveyouaclearpictureofyourfinancialsituationandhelp youidentifyearlyanypotentialcashflowproblems,those timeswhenthemoneycominginwillbelessthanthe moneygoingout Wecallthatthecashflowgap,more aboutthatinthenextsection.

Secondly,closelymonitorandmanageyourexpenses.Keep acloseeyeonyourspending,prioritiseyourexpenses,and constantlyconsiderwaystoreducecostswherepossible.

Andfinally,youcanactivelyworkonincreasingyourcash inflows.Thiscouldmeanfindingnewcustomers,selling moreproductsorservices,ornegotiatingbetterpayment termswithclients.

TheCashGap

Justasacashflowbudgetoffersinsightintothemoneycomingintoandout of your business on a weekly or monthly basis, it can also predict your business’s cash flow gaps, those times when there is not enough money comingintocoverthemoneygoingout.

A healthy cash flow is essential to any successful business If you want to remain in operation, it’s crucial you manage your accounts payable well enough to ensure you can pay your creditors, suppliers and employees on time.Equallyimportantisinvoicingyourcustomerstimeouslyandmanaging accountsreceivablesclosely.

Fromacashflowperspective,therearetwovaluableschedulestomonitor:

Your accounts receivable schedule – this will highlight those sales thatyouhaven’tyetbeenpaidforandwhenyoucanexpecttoreceive settlement. Worse case, unpaid accounts can leave the business withoutanycashtocoverexpenses.Morecommonlythough,delaysin recoveringtheseaccountscausecashshortages,makingitharderfor thebusinesstomeetcashoutflowswhentheyfalldue

Your accounts payable schedule – this will help you determine how well you are managing your cash outflows. It provides visibility into whenoutgoingpaymentsfalldueforthecurrentperiodandindicates how much cash will be required to cover those bills during the same period.

Taken together, these two schedules can enable a business to predict any likely cash flow gaps early enough to take proactive cash flow managementstepstoensurethatthegapsareclosedoratleastnarrowed whenthetimecomes

Y O U R P R O F I T & L O S S

YOUR PROFIT AND LOSS

A profit and loss statement, also known as an income statement, is a financial document that summarises your business's revenue and expenses over a specific period of time,typicallyamonthorayear.

The key components of any profit and loss statement are your revenue, or the money you made from your business, and your expenses, or the money you spent to run your business.

By subtracting your expenses from your revenue, you can determine your net income, or profit, which is the money thatyouhaveleftoverafterallyourbillsarepaid.

If your net income is positive, it means that you ' re making money and your business is healthy. If it's negative, it means that you ' re spending more than you ' re making, whichisnotagoodsign.

Now, what does this mean for you as a small business owner?It'ssimple,really.Byregularlymonitoringyourprofit and loss statement, you'll have a better understanding of thefinancialhealthofyourbusiness.

Y O U R B A L A N C E S H E E T

YOUR BALANCE SHEET

A balance sheet is a financial document that gives you a quick snapshot of your business's assets, liabilities, and equityataspecificpointintime

It represents the overall financial worth of the company andshowsthevalueofthebusinessfortheparticulardayit is created. This is an important point because profit and loss displays the results of a period e.g. a week, a month, etc. The balance sheet tells you the story for just that day becausegenerallycash,inventoryandsupplierinvoiceswill change on a regular basis, affecting the balance of assets anddebts

The key numbers on your balance sheet are your assets, which are the things your business owns, your liabilities, which are the things your business owes, and your equity, whichisthemoneyyouhaveinvestedinthebusiness

By subtracting your liabilities from your assets, you can determine your net worth, or equity, which gives you an ideaofthefinancialpositionofyourbusiness.

What does this mean for you as a small business owner?

The balance sheet provides a comprehensive picture of yourbusiness'sfinancialhealth,whichiscrucialinformation for making informed decisions about the future of your business.

By regularly monitoring your balance sheet, you can see how your assets, liabilities, and equity are changing over time, and make adjustments as needed This can help you stay on top of your financial situation and make the best decisionsforyourbusiness

Some adjustments you can make to improve your balancesheet:

Increase your assets by investing in new equipment or expandingyourinventory

Focus on reducing your liabilities by paying off loans or negotiatingbettertermswithsuppliers. Explore ways to boost your equity by approaching new investors for a capital injection or retaining more of yourprofits.

Y O U R B R E A K E V E N

YOUR BREAKEVEN POINT

Your breakeven point is the point where the cost of producing a product or service equals the revenue generated by the sales of that product or service In a nutshell, it tells you how much work you need to do before youstarttomakemoney

It’s important to note that the breakeven number is not simplycoveringtheoverheads(fixedcosts)ofthebusiness. If you only look at overheads, you fail to factor in the incremental variablecosts for each additional sale, which iswhywehavetodivideby grossprofitpercentage which works with costofgoodssold(COGS), typically variable in nature.

Howtocalculateyourgrossprofitmarginpercentage:

Grossprofit is total sales minus the COGS The gross profit margin percentage is calculated by first subtracting COGS from the total sales expressed as a percentage This figure is then divided by total sales, to calculate the gross profit margininpercentageterms.

U S E F U L T E R M S

USEFUL TERMS

Accounts payable: the expenses you need to pay for likesuppliers.

Accounts receivables: sales that you haven’t yet been paidforbyyourcustomers

Assets: items of value your business owns or derives valuefrom.

Current assets: Assets that are easily converted within one year to cash including bank accounts, debtors,stocketc

Fixedassets:Assetsthathavealongerlifespanand arenoteasilyconvertedtocashlikemachineryand vehiclesetc.

Balance sheet: a financial statement that reports a company 'sassets,liabilities,andshareholderequity

Breakeven point: the point at which its sales exactly coveritsexpenses.

Budget: a plan you write down to decide how you will spendyourmoneyeachmonth.

Cashflow: the movement of money moving in and out ofyourbusinessintermsofincomeandexpenditure.

Cashflow gap: the time between when you need pay your expenses and when you receive payment of the invoicesfortheitemsyou'vesold.

Costs of goods sold (COGS): the cost of goods sold refers to all the direct costs and expenses involved in producingordeliveringyourgoodsandservices,usually variable in nature. It does not include fixed costs / overheads

Equity: total assets minus total liabilities of an organisation.

U S E F U L T E R M S

USEFUL TERMS

Expenses/costs: Whatyouneedtospendtokeepyour businessrunning.

Fixed Expense - Expenses incurred whether or not you have sales like building rent, senior managementwagesetc

VariableExpenses-Expensesincurredbecauseyou havesaleslikematerials,deliverycostsetc.

Gross Profit: the selling price of your product / service lessthecostofproducing/providingit

GrossProfitmargin:measuresacompany 'sgrossprofit comparedtoitsrevenuesasapercentage.

Liabilities: something a person or company owes, usuallyasumofmoney

Currentliabilities:Debtsduetobepaidwithin1year, typicallysupplierinvoices(knownascreditors)

Long term liabilities: Debts to be paid over several yearse.g.bankloans

Margin: the difference between net sales and the cost of merchandise sold and from which expenses are usuallymetorprofitrealised

Markup:anamountorvalueaddedtothecostpriceof something.

Net Profit: the amount of money your business earns afterdeductingalloperating,interest,andtaxexpenses overagivenperiodoftime

Payment terms: the terms that detail how and when yourcustomerspayforyourgoods.

Profit and Loss Statement: a financial statement that summarisestherevenues,costs,andexpensesincurred duringaspecifiedperiod

Revenue:total income generated from the sale of your servicesorproductsbeforedeductingcosts.