For small business owners, a deep understanding of their company’s financial situation will significantly improve their chance of long-term success. When they know exactly where they stand in terms of their financials, they can plan for the future and avoid common financial management pitfalls.
Unfortunately, the fact remains, business owners struggle to get a grasp on their finances. In a recent North American study, 46 per cent of owners rated their knowledge of financial management as sufficient or less, while one in 10 surveyed believe that a lack of financial management knowledge is the greatest barrier to small business success.
Around the world, a common mistake made by owner-managers is to assume that accountancy is finance – nothing could be further from the truth. Accountants are financial historians whereas in business finance, this involves a very high degree of forward planning.
The following tips have been compiled to provide some general guidance to assist owner-managers take greater control of business finances, improving financial literacy and taking their company to the next level:
1. Do the sums. Do you know how much money it takes to run your business? Determine the true costs of your products and services, including wages, transportation, rent, marketing, insurance, phone, internet, utilities, taxes, and whatever else you require to function. That’s just the beginning. You need to learn how to effectively track money in and out of your business, a first step of which would be setting invoicing periods.
2. Uncover those other costs. Have you ever needed to obtain license? Even securing an online presence requires time and this costs money. The expense of these things can start adding up, especially when you factor in the cost of legal services, your own salary, return on investor capital, and capital for future expansion. Don’t forget to add the cost of borrowing money and the interest and debt you may have already accrued. Then start thinking ahead: once you can put numbers to everything that takes money out of your business, you can plan how much you will need to grow going forward.
3. Don’t avoid the necessary. A major challenge for business owners (this is true for large and small firms) is that if they don’t fully understand the figures, they assume someone else will…and will also look out for them. This is a major mistake. Not because of any trust issue but because owners with even a good level of financial knowledge can challenge costs and the impact costs can have on the performance of the company. This includes knowing and using of – income statements and balance sheets, understanding inventories and learning to manage cash flow and supply chain.
4. Take the landscape view. Become familiar with the general state of your immediate marketplace. Analyse your competitors and ascertain how your company stacks up against them in terms of goods, services, and pricing. Do a SWOT analysis and determine competitors’ strengths and weaknesses and identify opportunities therein. Additionally, work on deepening your understanding of your customers and figure out if they could and would spend more for what you provide (there are some easy – and free online tools that can assist you here).
5. Learn how to use financial training software. Business owners no longer need to take long journeys or days out of the office to improve essential financial skills. New online resources such as Ablata can provide valuable up-skill services that can assist owner-managers improve their financial skills significantly for a fraction of traditional in-class settings. Whether you have a good understanding of finance or are just starting to learn, pioneering software options can be structured to help owner-managers become proficient in the language of business finance in as little as 12 hours.
Worth isn’t just about price or what to charge – it’s about the true value of your business, which involves a combination of factors: your products, services, competitive landscape, and the value your business brings to customers. By educating yourself on your financials, and working with the correct tools and credible professionals, you’ll be on your way to a lifetime of success – without leaving anything to chance.