How to Sustain and Grow Your Business
No two ways about it. If you’re not comfortable with the numbers side of your business, you’re going to come up against a wall. There are financial concepts you need to know and monitor on a monthly basis. Successful business ownership requires a knowledge of what can impact your bottom line.
Here is an overview of major financial concepts you need to know:
- Forecast revenues based on past year’s performance. Take into consideration any changes in prices or product offerings, increases or decreases in production costs, or new revenue streams. An annual forecast of revenue precedes the building of your annual budget and ensures you have adequate cash flow to effectively operate your venture. Your revenue forecast should be reviewed each month for any adjustments.
- Review your accounts receivable process. Invoices need payment terms clearly stated at the top of the page. Consider offering an incentive for timely payments; issue reminders during the payment period you establish.
- Determine how any action might increase (yah!) or decrease your bottom line—the net profit earned after calculating the expenses you’ve incurred and the gross revenue received. If you average $10,000 in sales a month but plan to buy new office equipment in May, be sure to make an adjustment in your forecast (that you should be monitoring monthly!)
- Know how to calculate your gross margin, which is the percentage of sales you keep after subtracting the cost of producing the goods or services. If a company’s gross margin is 60%, then it is keeping 60 cents on every dollar it earns before shelling out for marketing, rent, utilities, salaries/commissions, insurance, etc.
- Nail down your costs in order to calculate profitability. If you’re selling goods, identify your fixed costs (those that do not change with the number of units produced) versus variable costs (that depend on the volume of units produced such as the cost of materials.) Instruct your accountant to walk you through your expenses to identify fixed vs. variable costs. For example, salaries for exempt employees are a fixed cost while commissions—and salaries for non-exempt employees who are paid overtime—are always variable.
Are you mentoring a start-up or launching a start-up?
Be sure to warn them of the pitfalls of commingling personal and business accounts. It’s a red flag to the IRS, a mark of unprofessionalism, and just a plain headache to sort out when figuring profitability.
Advise mentees to make sure they have enough cash reserves beyond the initial set-up costs. Since it will take a year or more to derive a steady revenue flow, they need to be ready to fund the unforeseen as you (hopefully) did.
Knowing the basics of finance enables you to understand your numbers and learn to love them as you grow your business.