Most business owners, most Managing Directors are not accountants. Yet most businesses get by, survive and thrive.
So what is it that these people running most businesses know or need to know if they are to be sustainably profitable and successful?
Six financial things.
1. Make profitable sales
Too many businesses do not make enough sales at a decent profit. Some are content to make any sales at any price and some do not make enough sales.
Sales are easy to measure – the total of your invoices. Get your invoices out to clients in good time and add them up so you know where you are.
But make sure you know how much each sale has cost so you can assess whether they are profitable.
If they are – great. If not then you have to do something about it or your business will fail.
2. Improve your margins
The margin on a sale is the sales price less the direct costs of making the sale – see our blog “Proof of Profit” 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.
3. 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 wait several months and then try to catch up.
4. 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!
5. Cashflow is everything
Businesses go bust because they run out of money. Therefore keep a tight grip on cashflow. Get your invoices out to clients on time and get them paid quickly.
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!
6. 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
Our advice is always for businesses to have 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.
Running a successful business is a challenge, but if you keep on top of these six financial things then you will be in good shape for everything else that comes your way.