The main cause of business failure is poor financial management. Figures from the Australian Bureau of Statistics indicate that more than 60 percent of small business cease operating within the first three years. Here are the tips on how to manage your business finances so you don’t go broke.

Being good at what you do is not enough. Good financial management is how businesses make sure that they’re making money. The odds of surviving in business long term are very slim of you don’t manage your business numbers.

The numbers you need are closer that you think and the good news for business owners is they probably already have the tools they need through the reports in their accounting system.

Understand your key navigation tools

The main reports you need to understand your numbers are:

  • Your Balance Sheet
  • Your Profit and Loss Statement
  • Aged Debtors and Creditors
  • Budget
  • Cash Flow Forecast

Balance Sheet

Your Balance Sheet is the most important report you need to look at. It tells you what you own and what you owe. This report shows your business assets, what you owe to external parties (your liabilities) and what you owe to yourself (your equity). It’s a snapshot of the true state of your business at a given point in time.

Your Balance Sheet is also a good tool to check how accurate your bookkeeping is, as the items in the balance sheet need to be reconciled. If your numbers don’t balance then your bookkeeping is incomplete or inaccurate.

Profit and Loss

Your Profit and Loss report is the report that really drills down into the details of what you’re spending and what you’re being paid for. The difference between these figures will tell you whether you’re actually making money our of your business.

Watch this report for unexpected changes including:

  • Changes in spending (have stationery costs gone up, or expected payments not been made?)
  • Bookkeeping errors (did someone miss a zero when they entered an invoice?)
  • Changes in payments.

Aged Debtors and Creditors

These reports tell you how much of your customers owe you and how much you owe your suppliers.

The Aged Debtors report details how much your customers owe you and how long they’ve owed it to you. The Aged Creditors report details how much you owe your suppliers and when you need to pay it.

Budget

Your Budget report is an estimate of what your income and expenses will be for a future given period and it is invaluable for planning your business strategy.

The Budget records what you plan to do with your finances based on expected sales and expected costs. Your Budget is a benchmark so you can compare what you plan with what actually happens.

Cash Flow Forecast

Your Cash Flow Forecast is an estimate of the inflows and outflows of cash for a future given period. It gives you the real-life details and tells you when the actual cash should move.

A Cash Flow Forecast is about regular cash transactions, it doesn’t consider accruals and adjustments such as depreciation (for example, as your company car gets older). It’s about ACTUAL cash flowing in and out of your business.

It should include large capital purchases so you know that they will need to be paid for and when. With a good Cash Flow Forecast, you can be on the front foot not on the back foot.

When you check your numbers regularly, you get a much better feel for how your business is going. You’ll know when things don’t smell right and you’ll be able to find our where you’re drifting off course – before disaster strikes.

 

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