Why Basic Financial Literacy is Essential to Making Money
Remember when you started your Small Business full of enthusiasm and excitement peppered with some trepidation about whether you’d make a success of it or not. You’ve worked hard, hustled to make sales, and hopefully now you’re covering your expenses and making some profit too.
The challenge you now face is the challenge that 90% of Small Business owners face, you don’t really understand the numbers. Perhaps you hate numbers or weren’t good at maths at school and as a result you’ve managed to avoid paying attention to the numbers in your business. Rather, you’ve been focused on sales and client service and just getting your business off the ground.
Step 1 – Make A Decision
The first step is simply to make a decision that this is the year you’re going to come to grips with your numbers. You’re going to make time in your diary to look at your figures and find ways to learn what they mean and how to interpret them so that you make informed decisions in the future.
Step 2. – Numbers to Look at on a Weekly Basis
There are three numbers you need to know on a weekly basis that will help with your cash flow and keeping the money rolling through the business. The first is the balance in your bank account which I’m sure you’re already keeping a watchful eye on.
The second is the balance of Accounts Receivables or Debtors. This is the money that your clients or customers owe you. The areas to focus on here is to be chasing up any accounts that are more than 60 days overdue. Give them a phone call and pin them down to when they are going to make the payment.
The third number is the balance of Accounts Payable or Creditors. This is the money that you owe your suppliers and other bills. This will include telephone and electricity accounts and any bill you get where you have time to pay the bill. Although not in the Accounts Payable figures, include on this list any taxes that are due and superannuation liability.
Armed with these three figures, you will get a much clearer picture of who well your business is performing.
Step 3 – Reports to Look at on a Monthly Basis
As a minimum you should be looking at both the Profit and Loss Statement and Balance Sheet at the end of every month. The Profit and Loss Statement will show you whether you have made a profit or a loss and details all the income and expenses that have been included in the calculation. By looking at this report, you will be able to identify costs that you may be able to eliminate or negotiate better terms for and whether you are making a sufficient profit on the sale of your goods and services.
The balance sheet gives you a snapshot of your financial position at the end of the month. Checking this report on a monthly basis will help to identify whether your financial position is improving or deteriorating.
Once you have systems in place for the weekly and monthly review of your financial reports, the next steps are:
- To create a budget projection for the next twelve months and then compare your actual results to the budget with the monthly profit and loss statement.
- Identify no more than 5 key drivers in your business that you need to focus on that will improve your profit.
By taking these last few steps, one business improved the gross profit on their sales by 30% over a 9-month period. This result, coupled with an increase in turnover, meant that the business turned around from making a loss with the owner taking no wages, to the owner taking wages and the business making a profit too.
It’s only by identifying your starting point and then focusing on the numbers, that you will improve them and see how far you’ve come. When you understand the numbers in your business then you will truly make more money. And remember, it’s never too early and it’s never too late to learn about your numbers.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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