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Do you know what your financial position is going to be like in three months’ time?

October 4, 2011 By 1 Comment

Most business owners do not know what their financial position will be next month let alone three, six or twelve months in advance. What impact would knowing where your business will be financially in say, three months’ time have on your business?

Here are five steps to get you on the road to foretelling the future in your business.

  1. Set a budget
    Plan your goals and set yourself targets in terms of your turnover as well as related costs. Consider what you want to happen in your business. What do you want to achieve in terms of revenue based over the whole year and then broken down on a monthly basis?
  2. Track your progress
    Track what you plan against what actually happens and compare the two outcomes. Measure and track, measure and track, measure and track. That is the only way that you are going to be able to forecast what your financial position will be in three, or six, or even twelve months’ time.
  3. Tweak your plan
    Adjust your plan to help you reach your goals. This is where you tweak your budget as the months go by. You want to make sure that the variance between what you plan to happen and what actually happens gets smaller and smaller each month giving you the ability to accurately forecast income and expenses for your business.
  4. Analyse the difference
    Find out why differences occur and what has happened to take you off track. This will enable you to narrow the difference between what you want to happen and what actually happens. The more you do this, the more accurately you will be able to forecast what will happen in coming months.
  5. Recognise the difference
    Now that you are forecasting pretty accurately in terms of the performance of your business, the performance of your revenue and the performance of your expenses, you need to consider off Profit and Loss payments – outgoings that are going out of your bank account which do not appear on your Profit and Loss Statement. These include payments you make to the tax office, loan repayments, hire-purchase agreements and business owner drawings that are not part of a wage or salary.

By encompassing what has happened in steps one, two, three and four, your Profit and Loss Statement, and then bringing in step five, your bank account, you are now able to see what the true financial position of your business will be in three months’ time.

Filed Under: Accounting, Business Financial Mangement, Cash Flow, Financial Management, Profits Tagged With: , , , , , , , , , , ,

Why is there a difference between my Profit and Loss Statement and my cash flow?

September 27, 2011 By Leave a Comment

The most confusing area for small business owners can be understanding what is actually happening in their accounts.

Product based industry

The biggest challenge that product based industries face is the actual product they sell – stock. The key element to understanding the difference between your profit and your cash flow lies in a number of variables:

  • How long you are holding your stock
  • How long it takes you to pay your suppliers for that stock
  • How long it takes you to get paid by your customers for that stock

Your Profit and Loss Statement shows purchases and sales. It records the sales transaction, but it does not record how long you are holding the stock item, how long it takes you to sell that specific item or how long it takes your customers to pay you. That is all shown through your bank account. Your bank account is your cash flow and this reflects the real transaction. These variables have the biggest impact in terms of the differences you will experience.

Service based industry

For service based industries the theory is essentially the same, as the challenge lies with your ‘stock’, that is your time. The variables you need to consider are:

  • How long you are keeping work you do for clients in a ‘work in progress’ state
  • How long it takes you to charge out your time
  • How long it takes you to pay your suppliers (i.e. contractors/staff)
  • How long it takes for your customers to pay you

General considerations

Identifying payments that go through your bank account that are not captured on your Profit and Loss Statement impacts all industries. Often small businesses don’t understand what these are. When working out differences, be sure to include the ‘off P&L’ items such as:

  • Loan repayments
  • GST payments
  • PAYG payments
  • Other Tax Office payments
  • Hire-Purchase payments
  • Business owner drawings (if you are not paying yourself a salary/wage through your payroll)

These items are not allocated to your P&L Statement/Report, so if you draw from your P&L and deduct these items you should be able to get a reality check in terms of what is truly happening in your business. To get the real picture you need to look at all these factors, not just your P&L in isolation.

Filed Under: Accounting, Business Financial Mangement, Cash Flow, Financial Management Tagged With: , , , , , ,

The Missing Link Syndrome

September 20, 2011 By Leave a Comment

Did you know that more than 87% of small business failures are because they do not understand the money side of their business?  That is a scary statistic isn’t it.  And one that should not be taken lightly!  This statistic is the basis of my ‘Missing Link Syndrome’.  Most business owners do not have a financial or accounting background and many the numbers side of their business makes their head spin.  Does that sound like you?  If so, I have some bad news for you….

You  need to understand key numbers in your business and that the missing link in your business is you!

You most likely have a bookkeeper and an accountant, but what about all the in-between information that is really important for you to understand.  You are the only person that can get the information in order to gain an insight into your business’ performance.  You know your business better than anyone else; but you also need to know your numbers better than anyone else if you do not want to end up in that 87%.  I am not talking about knowing all your numbers, just the key numbers directly related to communicating how your business is really performing.

How?

You could enlist help from your bookkeeper to provide information; you could choose to go over this with your accountant  regularly, or you could partner with other people in the market  that can really help you.  Confident Cashflows was designed to fill this missing link for business owner providing products and services to help businesses fill the ‘missing link’.

If you need advice on which questions to ask to get the right information, check out either of my articles “How to choose a good bookkeeper‘ or ‘Why doesn’t my accountant give me more information on how my business is really performing’.

 

Filed Under: Accounting, Business Financial Mangement, Cash Flow, Financial Health Check, Financial Management Tagged With: , , , , , , , , , , , , , , , , , ,

Choosing accounting software for your business

September 6, 2011 By 1 Comment

Choosing accounting and data entry software for your business is much the same as choosing a car. Some people prefer Fords, some like Toyotas, but what it comes down to is your preference. Accounting and data entry software is no different. It is a preference for the business owner and what works for you. There are many cloud based software solutions available with a range of features and benefits:

  • the software allows everyone to work on the same file at the same time
  • as a business owner, you can carry on with business (if using a Point-of-Sale system) while your bookkeeper or accountant accesses the system or enters data
  • simultaneous use of files and data without interruption
  • consultants can access information from anywhere
  • there is no confusion regarding the latest backup
  • it is easy to use

I personally like cloud based software as it means I can access detailed information without interrupting your business.

When choosing accounting and data entry software remember that there are many available and some are marketed more than others, but this doesn’t mean to say they are necessarily better. You really need to find what will work for you in your business and also consider what your bookkeeper and accountant prefer.

Filed Under: Accounting, Business Financial Mangement, Cash Flow, Financial Management Tagged With: , , , , , , , ,

How to understand what your accountant is saying!

August 30, 2011 By 1 Comment

All professions have their own jargon and accountants speak a language foreign to most business owners called ‘accountanese’. Just the same as website designers and IT guys speak a language I call ‘ITgeekspeak’.

Do you sometimes feel overwhelmed when you leave your accountant’s office thinking, ‘Why can’t they just speak English?’ You have just spent an hour or so with them and you still have no idea where your business is actually at.

If you have ever experienced this feeling here are some tips to remember for the next time you meet or speak with your accountant and they are not speaking your language:

  • Tell them to STOP
  • Ask them to speak in layman’s terms
  • Ask for answers relevant to your business
  • Ask questions that will give you the information you need for YOUR business

Business owners do not necessarily want nor need to know what the ‘return on equity’ is, for example. There are a myriad of accounting ratios that indicate performance; however, they do not tell you what profit you are really making, what your profit is this month compared to last month or to the same time last year, what your cash flow looks like, why there is a difference between your Profit and Loss Statement and what is happening in your bank account, or whether your staff are performing efficiently and are bringing in enough revenue.

You need to ask your accountant how long it takes for you to get money in from your clients or customers, and how long on average it takes for you to pay your suppliers. These are questions that are paramount to understanding cash flow in your business. Questions like these are simple for your accountant to answer.

The best form of advice I can give you is: Ask specific questions related to YOU and YOUR business; don’t ask for general feedback. Think about the specific pain areas that you are experiencing in your business and the challenges you are facing. Asking specific questions directly related to your business will help your accountant identify the exact information you are looking for. With accurate, plain English answers in hand, you will be able to make the necessary changes that will improve your future profit and loss and the performance of your bank account!

Filed Under: Accounting, Cash Flow, Financial Management Tagged With: , , , , , , , ,
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