Chapter 4: Financial Management
Financial Management is so essential and is not as difficult to understand as many people think. Many business people hide away from financial management saying, I don’t really understand figures, I am not good at math. Well that may be the case, but it is not an acceptable excuse. If you do not understand the financial aspects of your business then you will be working in the dark guessing whether you are making a true profit. You need to understand cash flow and also prepare a monthly profit and loss statement. In my book there is detailed explanation of how you can achieve ‘know how’ about your finances.
To run a business successfully you must have a monthly profit and loss statement. Without a monthly P&L you will be running your business in the dark and guessing if the business is profitable. Don’t use the excuse that you cannot afford to get someone to do this for you. If this is your answer then you know that you are not making money as you cannot afford $25-30 an hour for a bookkeeper once or twice a week!
A P&L is the only measure to determine the financial success, or failure, of a business. It is an accurate report of the monthly sales, overheads and running costs of a business. From this information you can see if sales were higher, or lower, at certain times of the year.
You can then investigate if this was because of seasonal trends, poor or good weather or holiday time. Once you know the reasons you can direct your advertising and promotions during good times of the year to increase sales even more, or at bad times to improve the months with low sales.
The P&L will give full details of all costs; you can then go through these to see if there are any savings that can be made to improve the net profit of the business. Whatever you do make sure that you recognize the importance of up to date, accurate financial information.
In business the only thing that matters is if the business makes a net profit.
Too many businesses are totally sales driven and do not pay enough attention to the profits of the company. People boast that they have increased sales by 100% thinking that it will impress. It does not impress me unless they tell me that they made a net profit of 10%. They will talk about making a 70% gross profit, but that means nothing if there is no net profit.
There is the challenge to get a bigger share of the market. All well and good but if it does not increase profits then the extra sales do not benefit the business in profitable way.
Be concerned about sales because that is where the revenue for the business comes from. But do not sacrifice profits just for the sake of more sales. Never ignore the essence of your business, to make a net profit.
So many business people are afraid of asking their customers to pay their bills. I do not know why this is; I am told it is because they are scared that if they nag customers to pay they will stop doing business with them.
This may be the case, although I think that it is highly unlikely they will stop doing business with you. If you are supplying something they want, which you do as they buy from you, then they will not stop buying as they are making money from you.
Everyone tries to delay payment, the reason is that they companies use the money the owe you to pay others which saves them borrowing more from the bank. In effect they use suppliers as bankers because there is no interest on this money.
In business it is important to gain the respect of customers and suppliers. One way is by demanding payment on time. Work on the basis that they buy from you as they sell you goods and make money. Make them aware that your terms of payment are 30 days.
If there is no check on the 30th day call them asking where the money is. Point out that your payment terms are 30 days and that you must be paid on time according to your agreement. Tell them that you cannot give extended terms. Nag and nag until you become a nuisance, this usually works because they hate your daily phone calls and they will pay you before others who do not nag so much.
Read selected chapters from the book on the links below:
- 1. Starting a Business
- 2. Identifying Your Audience: Marketing & Selling
- 3. Maximising Your Audience
- 4. Financial Management
- 5. Raising Money: Buying & Selling a Business
- 6. Professional Advice
- 7. Why Businesses Fail
- 8. Motivate Yourself to Success
- 9. What is an Entrepreneur
- 10. Summary of Points to Remember