Why it’s critical for your business

It can be really daunting getting your head around your business’ financials, especially if you’re just starting-up.

But there’s really no need to worry – unless you’re ignoring your numbers! Ignorance isn’t bliss – more so as far as the ATO goes. It’s a big red flag begging for closer audit attention.

For every business, even those just starting up, it’s vital that you have accurate information delivered in a timely way.

The definition of timely however, differs for each business depending on what products or services your business provides. For example if you’re in retail, you’ll

want to know your takings on a daily basis. Whereas a consultant might only need to review their numbers monthly. And for some businesses, it might be weekly.

If you’re not tracking your short and long term numbers, how will you know if your business breaks even, makes a profit, or whether or not you should hire your next staff member? Or who to chase for payment and who’s using your business as a credit institution. You won’t.

By taking the time to understand your key financial information and the documents that sit along side, you’ll gain far greater control over your finances and develop a much clearer picture of your business and how it’s performing.

As with so many other things in life, the best time to get your financials sorted is ten years ago or now. You don’t want to look back in 10 years time and wish you’d done something then. Start now.

To make that easier, we’ve given you a list of the key financials you need to get your head around.

3 key financials all business owners MUST understand;

Your business budget – You need to know what you’re likely to bring in in terms of revenue. That in turn tells you what your business can afford to spend. If you track your projections against actuals – you’ll know if you’re meeting your numbers and where those numbers were off. It also helps you plan your marketing, sales and staffing cycles.

You can also look at which clients or products represent the biggest chunks of your business.

Financial statements – Accounting 101: Your balance sheet and profit and loss statement. These two documents will be the foundation of your business financials.

Your business balance sheet ‘paints the picture’ of your financial strength – identifying your return on capital, equity, and financial strength.

Your profit/loss statement displays your performance – what went well and what didn’t go as planned. If you set things up well, you’ll be able to see which clients or products are responsible for your better margins and which ones aren’t. Then you can do something to increase the good and decrease the not so good (more on that another day).

Learn more on why good financial statements are necessary.

Your cash flow – Cash is often said to be king. And to not have enough is one of the largest causes of business failure. Not only does positive cash flow keep your business afloat, if you manage cash flow effectively, you’ll be able to better manage your financials and invest your money to gain competitive advantage for your business.

The best way to monitor your cash flow is to create a cash flow forecast. This will allow you to see what’s coming in and what’s going out and when. The last things you want are:

  • To run out of cash when superannuation or tax are due
  • To not be able to pay yourself a wage for an extended period of time (despite what you might read in the popular press). No-one goes into business to continually work for free

Next post, we’ll give you some tips to help you think about monitoring your cash flow.

Understanding your business’ numbers and key financial information, will show you opportunities to exploit, where savings can be made or where the room for improvement is. But if you don’t have those numbers – you’ll never know for sure. Gut feeling is great – but being able to check that against reality is crucial.

And if the ATO comes knocking at your door – you’ll be ready. And if ever you are audited, having your records in order is likely to cost you considerably less than it would, if for example, all your records are in a shoebox somewhere, in the attic, you think… you get the idea.

If you’ve questions about how to best set up your financials or how to get them in better order or if you just want to run something by us, we’d be delighted to really talk to you either in person or over the phone. Call us on 6023 1700.

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