| Many businesses fail because they do not have a proper business plan or they do not follow it. Keeping a business sustainable means comparing your records to your planned sales costs and cash flow, and acting if anything goes wrong. | ||||||||
| As the owner of a small business it is easy to become caught up in the actual work and lose sight of the fact that you are also needed “at the top”. This is where a financial practitioner or accountant can help. Between this professional and the business owner, the financial management of even a small company should include: | ||||||||
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| Understand the value of money For example, if you invest US$1 000 that generates a monthly profit of $20, then over five years you make a paper profit of $200. But over five years, what looks like a 20% return is effectively only 7,4% per annum. You would make more money, with less risk, by putting the cash in a fixed deposit or money market account. Learn to do more – with less You need to understand the nature of your business costs and how these inter-relate with sales, inventories, cost of goods sold, gross profits and net profits. In analysing your expenses, use percentages rather than actual dollar amounts. For example, if you increase sales and keep the dollar amount of an expense the same, you have decreased that expense as a percentage of sales. When you decrease your cost percentage, you increase your percentage of profit. On the other hand, if your sales volume remains the same, you can increase the percentage of profit by reducing a specific item of expense. Your goal, of course, is to do both: to decrease specific expenses and increase their productive worth at the same time. Before you can determine whether cutting expenses will increase profits, you need information about your business – and that means having a good record-keeping system. | ||||||||
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The figures don’t lie | ||||||||
| Proper records will provide the figures you need in order to prepare: | ||||||||
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| The value of ratio analysis |
| Use your income statements and balance sheets to check the profitability and liquidity of your business. Here are some formulas that show, at a glance, how healthy your business is: |
| Liquidity (how easily an enterprise is able to pay its debts): |
| A ratio of “2” is generally believed to be a good liquidity benchmark, but compare your ratio to similar businesses in the industry, and take into account trends within a company itself. This ratio excludes inventories from current assets, as they can be difficult to convert into cash. Here, a ratio of “1” is generally believed to be a good guideline. |