Main article content
How well do you know your business finances?
Date: Oct 6, 2021
So, Cash is King right??
Absolutely. But only if you know how you created it and how much of it belongs to the business.
Some businesses will be happy if there is a lot of money in the bank. However, it is likely that some of this money will be owed for tax bills (payroll, VAT, corporation tax or personal tax if a sole trader), owed to your suppliers, perhaps for a business loan if someone helped you start out in business or maybe a bank loan.
Once you start removing the amounts you owe the cash can quickly diminish.
The worst possible way to run a business is to think that “everything will be okay”. It won’t. There are always hiccups along the way. The last 2 years has shown that quite clearly.
Not only do you need to know how much of the cash belongs to someone else you also need to truly understand how you created it otherwise how can you create more cash?
If you’re a retail business then this is linked to your products and in the simplest form, how much you bought them for versus how much you sold them for. But there is so much more to it. You’ve probably spent money on marketing to advertise them, postage to get the goods to your customer, your time to manage the order and process the order, perhaps you have staff who are involved too. Once you start to take in all the elements involved to find and buy that product, sell it, and get it to your customer, any money you think have made soon reduces.
It’s even harder if you provide services because how do you value what your own time is worth?
It’s difficult as a business owner to be 100% honest on this because in your heart you want the business to succeed. But unless you look at the granular details in areas such as pricing and get really practical, you’ll never know
If you talk to other business owners, or perhaps a business coach, they’ll probably ask about your turnover (sales) and your profit (the money left after all your costs). They may even get really technical and ask about your EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation). This is how they’ll measure your success.
Yes, they are all important and yes, it is good to understand them but not if you don’t know the journey to get to these figures.
In our personal opinion, the most important thing you can look at and ask yourself is “where can my business fail?”
If you can practically pull your business apart from the very beginning of the customer journey (whether you are a product or service business), all the way through their life with you as a customer to see where this path could fail, you can start to mend those gaps.
Some people might call this SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) which you typically put into boxes. You can also draw your customer journey out as a line and note all the elements, or perhaps a spider diagram with the spider legs being every element moving out from your customer in the centre.
As long as you do something you are giving your business the best possible chance as you will understand not only the customer journey, but every cost along the way, every sale and every margin on that sale (your profit).
It’s important to not forget those static costs, such as an office or co-working space, subscriptions for software, accountancy fees etc. These will also be deducted before you have a figure that belongs to the business.
There is a lot to think about and it can be quite scary when you start but it actually empowers you with the knowledge to make the best decisions for your business. It will then have the best chance of succeeding that you can possibly give it. Isn’t that worth getting scared for???
If you find yourself wanting to know your business finances better, then we're here.