Understanding the numbers: Financial management for business owners
Ever wonder why your sales seem to be growing yet your profit remains the same? Or why your business appears to be making a profit yet there’s no cash to show for it?
The answer lies in developing your financial management skills. Many small business owners don’t invest enough time in learning how to interpret their financial results because they see it as too difficult and time-consuming. Instead, they focus on growing their sales, without fully realising the impact this has on net profit and cash flow.
If you’re a small business owner, having strong financial management skills ensures that you’re able to meet your business and lifestyle goals and remain financially viable – for yourself, for your employees, customers and suppliers.
What does good financial management look like?
Financial management involves identifying and understanding the financial impact of any business decisions you make. This means you need to be able to readily access and interpret the following key reports:
- Projected profit and loss statement
- Projected balance sheet
- Cash flow forecasts
These reports will form your financial plan, which, if your business is performing well, aligns with your strategic business plan.
How should you use your financial plan to monitor financial performance?
Once you have developed the three reports, you should use them to monitor and control your business performance on a monthly, weekly or even daily basis. There are a number of different methods you can use.
At a minimum, you should be undertaking variance analysis monthly or weekly. In simple terms, variance analysis involves comparing your actual results with your projected (budgeted) results and identifying what the difference means to your business. Once you have identified what is causing the variance, you can then act to address it.
You don’t need to review every single variance. Rather, follow these three steps:
- Determine what your key financial performance indicators (KPIs) are. Choose those that have the most impact on your profitability and cash flow. Usually, this will include sales, your key expenditure items and your net cash balance.
- Determine the level at which the variance is worth noting. This could be a dollar figure or a percentage impact.
- Investigate why the variance occurred and take corrective action to address the difference.
Successful small business owners are those who plan. Planning involves identifying your business goals and breaking them down into action items supported by your financial plan.
Running a business is not a “set and forget” process. You need to actively monitor the health of your business by constantly evaluating your strategic and financial plan and taking steps to keep yourself on track for success.