Accounts are a riddle wrapped in a spreadsheet inside a cloud of jargon!
As someone famous might have said.
Look – we both know I’m not a numbers person.
But I am a profit person!
And I know I need to make the effort to try understand our financials.
So, in a nutshell, what do I need to know?
Most people who run businesses aren’t accountants.
But quite a few of my family run their own businesses so some important financial basics were drummed in to us at an early age.
I’ve tried to apply their advice in the real world and it’s not always easy. But it’s not always like swimming through treacle.
So, in a nutshell, my Top Five “Financial Essentials for the non-financial” bits of advice are as follows:
Always look to improve your profit margins
The margin on a sale is the sales price less the direct costs of making the sale – read “” for more details.
Only two factors drive the margin – the price you charge and the costs you incur. So to improve your margin you can increase your sales prices and reduce your costs, ideally both.
Improving the margin generated by each sale has a very positive effect on the bottom line so don’t be afraid to push up your margins.
It makes a real difference to profits and cashflow.
Keep your bookkeeping up to date and accurate
It’s very difficult to know how your business is doing without keeping the books up to date.
These days there are excellent, cheap bookkeeping packages on the market that allow you to create your sales invoices and do all of the bookkeeping as well as producing VAT returns and management accounts.
You can learn to do this yourself or outsource it. Either way – ensure the bookkeeping is up to date and accurate so you know where you are.
Apart from anything else, it’s much cheaper to get bookkeeping done from the beginning rather than fall behind and then try to catch up.
Have decent management accounts that fit your business
Your bookkeeping will generate your management accounts.
These should include a profit & loss account for the month and year-to-date but also keep track of debtors, creditors and your bank balance.
Make sure your management accounts are a good fit for your business.
- Can you see the margin clearly?
- If you are a project-based company, can you see the profit you are making on each project?
- If clients pay you in advance for services delivered in the future make sure the sales income is spread over the correct period so you don’t think you’re richer than you are!
Some accountants make my make my blood boil!
Too many accountants just account for costs in line with the standard categories in the software. They give no thought to what the business needs to measure and consequently the reports aren’t helpful.
Garbage in – garbage out. Brought to you by the hard of thinking.
Cashflow is everything
Businesses go bust because they run out of money. So keep a tight grip on cashflow. Get your invoices out to clients on time and get them paid quickly. GoCardless, a direct debit service, may be your new best friend.
Be prepared to stop selling to a customer who is not paying and also be prepared to take legal action to enforce payment.
Margins can have a huge impact on cashflow. The higher your margins the more money you make from each sale and therefore the better your cashflow will be when you have been paid.
Remember: Your business is not a bank, so don’t act like one!
Set aside money to pay tax
All business pay tax. So put aside the money to pay it.
- PAYE and NI from your payroll are payable in the middle of the next month
- VAT is payable each quarter
- Corporation tax is payable nine months after the year-end
Try having two bank accounts. One for tax savings and one for day to day use.
By putting money into the tax savings account every week or month you know you have money to pay tax when it’s due but it also drives you to collect what you are owed so that the day to day account remains healthy and you can pay staff and suppliers.
Financial essentials for the non-financial
Can’t argue with any of the above! Good points, well made.
How about your business? How do you get on with the financial essentials for the non-financial?
If you need a bit of help then give us a call on 020 7125 0270 or email info@bluedotconsulting.co.uk
Michael – @bluedotmichael
Related links:
There are two types of business – those that don’t need a cashflow model and all the others
