Business Financial Literacy

Every day I read an article, or come across a post about the importance of financial literacy as an individual. But what about as a business owner? Can the same tips apply to business owners? I would like to think so. It just requires different thinking.

Some key things to focus on when talking about your personal finances are budgeting, cash flow management and tracking your expenses. Well in your business you should focus on these same three areas. You have to understand how each of these things can and will affect the growth of your business.

When you see the term “Financial Literacy” you may think that it’s a bunch of complicated, boring and meaningless information. But in simple terms it’s all about knowing and understanding where your money comes from and how you are spending it. Knowing if it is working for you or against you. As a business owner, this knowledge, if used properly, can help you take your business to the next level. It will help you make better business decisions which will in turn allow you to thrive financially in your life and in business.

Budgeting

Creating a budget is essential to any business. Simply put it is the planning of when and where you expect your income to come from and how you are going to spend it. It is the foundation for managing your cash flow. Without a budget in place you are essentially operating your business in the dark. Spending money on anything you think will help your business without knowing if it will. Without a proper budget you have no idea if the income you are making can really cover your costs for the month.

Cash Flow Management

Managing your cash flow by forecasting. Forecasting is the process of taking the information you know about the revenue coming in the door and expenses going out the door, and predicting how it will keep your business running at an optimal level. When you stop and look at your financials periodically, you are able foresee the path that your business is on and make changes to your budget if need be to keep your account in the black and out of the red. Remember, a budget is just the plan on how to reach your goals, but proper financial management is the lighted path that will lead you there.

The Importance of Business Financial Analysis and Management

Planning and Control are the two most important ingredients to a Successful Business. A Business Plan takes most of the guess work out of Business Strategy and Control through solid Financial analysis. Financial Data provides a way to gauge where you are in your Strategic Plan, telling you where changes in your Plan are necessary. Because of this, Financial Data Analysis and Management are vitally important to running a successful business.

It is extremely important to have a suitable Accounting System installed throughout your business so data acquisition is easy. You cannot manage your Business for Profitability without a good Accounting System. My CPA has a bookkeeper who comes out to the business to help install the Accounting System and show us how to work it. All of this is done with the guidance of the CPA but at a fraction of the cost. A good Bookkeeper is invaluable in helping capture Financial Data. Having an established working Accounting System in place will minimize the fees a CPA charges to analyze your tax liability and prepare your tax returns.

An Accounting System is typically built around the following key Financial Management tools:

– Income Statement (Profit & Loss Statement)
– Cash Flow Statement
– Balance Sheet
– Budget
– Breakeven Analysis

By having a Financial Management system in place, you can easily identify early warning signs or spot particularly profitable areas. Not having a system in place to analyze and organize Financial Data makes it impossible to effectively manage, grow and control a business. It makes it impossible to gauge the success (or lack there-of) of your Planning and Strategy. Moreover, used incorrectly, inaccurate Financial Data can be disastrous for a company’s livelihood.

An Accounting and Financial Management System is only as useful as it is used systematically throughout an entire business. It is extremely important to implement the system into the very fabric of the business and be used systematically. The Accounting System is a reflection of the health, or lack thereof, of a business and from which business decisions are made. Make sure to set it up right, train your people on it and most importantly, use it!

Two principal objectives of any business are to be Profitable and have Cash Flow to pay obligations. The Income Statement and Cash Flow Statement figure prominently in this area. The Income Statement represents how well a Company is operating, and the Cash Flow Statement shows how well a business is managing its Cash. Profit or Loss on one side and Liquidity on the other.

The trick is to find a good balance between Profits and Liquidity, which when not well planned for, can be very difficult to maintain. Fast Growth with high profits can drain the liquidity of a business, so being Profitable is no guarantee you’ll stay in business. The role of the existing and projected Cash Flow and Income Statement is to help you identify problems areas so you can effectively plan for them, such as raising more capital, infusing more equity or obtaining finance. Moreover these two statements help you identify areas which can be better controlled and managed, forestalling the need of additional capital and funding.