Understanding money and finances in a business is not something we’re taught in school. We’re really lucky if they even touch on personal finances. This puts business owners in a really hard place when they finally want to begin their own business, because as passionate as they are about the work they do they need money to keep their business afloat.
Many business owners don’t speak the language of accounting
The industries that I’ve seen that most feel this pain are creative industries such as architecture, performing arts, film and video; and construction industries such as roofing, industrial, and home improvement, but truly, anyone in any industry can relate.
In ActionCOACH we have “Money Mastery”, which is essentially coaching clients to understand their business financials.
Think about this: If business is a game, what’s the scoreboard? Yes, your financial statements. The question is if you can’t read the scoreboard, how do you know the scores? If you don’t know the score, how can you tell who’s winning and losing?
Imagine boarding an airplane and while the pilot greets you at the entrance, he looks into the cockpit and says, “Wow, look at all those dials!” What would you do? You’d probably refuse to board the plane!
It’s the same with your business. How can you lead your employees well if you can’t read your own numbers? How is your decision making affected?
We talk about this more in-depth in this week’s video about the three financial scoreboards that you should have a somewhat deep understanding of to be able to properly manage your business. To summarize, it’s the Balance Sheet, Profit and Loss Report, and Cashflow Statement, but the video dives deeper into what these mean and how they affect your business.
Budgeting Could Increase Your Business’s Performance
What the video does not address is how to budget in your business, which really is a key element to managing financials.
A good budget must include a Profit Break-even. So getting to your Profit Break-even you need to do the normal breakeven analysis, but add in your expected and budgeted Profit. The normal breakeven analysis, whilst good at keeping the wolves from the door, is not sufficient from a budgeting and planning perspective. Every single one of us is in business to make a profit – and this needs to be budgeted for. Whether you use a percentage of sales as a budgeted profit target or an ROI (Return on Investment) calculation is up to you.
If you’re not budgeting for profit, you will never make any, and second, you could just as well sell up and move your investment to an investment company. They’ll happily give you a return between 10% and 20%, and therefore your business should at least be doing the same! We then translated the Profit Breakeven into the KPIs for yourself and your staff… and only when exceeding these do we even think about sharing the spoils.
A good budget should include your profit target, your as well as your staff’s annual increases, commissions, a reasonable allowance for an increase in expenses, provision for non-payment or bad debts, and yes, even the good old taxman’s portion!
How to Create and Manage a Budget to Increase Profits
Start with a ‘wish list’ for your business. Enter the salaries and expenses as you would like them to be. First, put in the ‘new’ thinking before referencing past performance to see where adjustments would be required. Too often, we allow the failures of the past to dictate the budget of the future. This makes us more conservative and stints our potential growth.
The balancing act is then required between the future aspirations and past performance in line with what you can extract from the business and the market in the new year. If you want to be doing ‘new’ things in the new year, then make sure the budget and associated actions also change. No point in having a budget that no one is ever going to follow or reference. Anything is possible IF it goes hand in hand with the right changes.
Your new budget should then be a living document and not lie idle until the next budget cycle. Constantly revisit the projections and the actual costs and make sure you update where necessary. You might be able to be making more money or even less. The quicker you’re able to realize this and respond with an updated budget, the quicker you and your staff can take the actions to ensure you stay ahead of the goals you’ve set. If not, you’ll fall into the trap most people make – whereby it’s easier to downgrade and reduce your goals rather than take corrective action and still achieve the desired outcomes.
With a good budget, the cash flow forecast will then merely manage the timing differences between the projected income and/or expenditure actually realized in your bank account. Together with the Monthly Management accounts where you’ll analyze the projected versus actual performance, you’ll quickly be on a path to success and a much more profitable and relaxed new year.
How to Achieve Money Mastery in Your Business
If you find yourself struggling with these concepts or just want to truly become a master in your financials, we work with businesses like you all the time. We know how hard and confusing it can be and how it can be an extra stress that takes away from the joy of owning your business. Reach out to us today and book a complimentary coaching call to discover ways to make the process a heck-of-a-lot easier.
