Many aspects go into starting a business: having a good product and making sure there is demand for it, having a clear purpose, having the right team in place, etc. In this article we will focus in how you can use accounting and financial planning to set your business up for success.
The entrepreneurs I work with possess a wide range of business skills, from not knowing the primary financial statements to having an MBA plus multiple graduate certificates to everything in between. What education is required to be a successful entrepreneur will vary depending on who you ask. However, I believe that there are simple steps anyone can take regardless of their skill level and still scale a business over 1 million dollars in revenues.
First, know your product margins
Sales – Product costs – Fixed costs = Net Profit
Product Costs include all direct costs. Many business owners get product costs wrong as they often miss some of the expenses required to produce the goods and services. Underestimating product costs will deplete your bottom line.
What are direct costs? direct costs or variable costs are all costs related to producing your product and service. They include variable labor (operations and production staff), product costs, freight, and sales expenses.
How to get direct costs right? Be highly analytical about every step of production and hidden labor that may need to go into producing or selling your products and services. After determining what it takes to deliver your products and services, learn how this number changes as quantities and other factors change. Understanding how costs vary as quantities change will allow you to make fast calculations and respond quickly to changes in input prices.
Get a firm grasp on the budget
Another critical aspect that requires attention is what is the maximum level of sales your installed capacity can produce.
How do I create a budget? List all your fixed costs. This list includes things such as your rent, administrative labor, software, lease payments for machinery, advertising, insurance, recurring subscriptions such as software. Knowing this will allow you to understand how your fixed costs will change as your sales levels increase after a particular threshold and what that threshold is.
Why does my business needs a budget? Having a budget enables you to plan ahead and not be overwhelmed by growth or, worse, avoid it because you don’t know what it takes to take your business to the next level.
Having a system to track your income and expenses is essential for running and growing your business. Many new entrepreneurs overlook this and wait until tax time to start doing books. Starting your books early, even before you launch is an essential step.
How to get started with bookkeeping? decide the best system to get started. Options include excel, QuickBooks, Xero, and other. The right answer will boil down to preference, but if you plan to grow your business, we recommend using an accounting software.
How can I improve my bookkeeping today? Ensure that someone is accountable for properly recording the transactions as well as preparing reports is a great start. Make sure the team you have in place understands the your business, your requirements and has the right skillset to prepare your books and produce the required reports.
Having a skilled bookkeeping team is essential for growing your business. Your books need to be done on time and accurately so you can have useful financial reports.
Which financial reports do you need for my business? Profit and Loss, Balance Sheet, Accounts Payable and Accounts Receivable, Budget vs. Actuals are a good start. Many business owners have QuickBooks set up but do not access the reports regularly. Keep in mind that the quality of your reports is a direct result of your bookkeeping.
How often do I need to review reports? We advise creating a system that will force you look at your books and financial statements at least once a month.
Why do I need to check my Profit and Loss?
Tracking your expenses and making sure that there are no expenses that you might have overlooked. You might have assumed freight costs to be a certain percentage of sales, but they could be either higher or lower in reality. Making sure you set a system to track this and understand the variances is key to keeping an eye on your variable costs.
The main challenges small business owners face with financial reporting is bookkeeping. Business owners often lack the resources to have someone in the team be accountable for producing financial statements. Often business owners will put the burden on a family member or themselves or not hire the right outsourced solution for their business. These are all costly mistakes.
How to ensure your business has financial reports on time? Put a team in place that can be accountable for preparing reports. We help our clients by delivering monthly financials alongside insights. We also provide ongoing support to help analyze and make sense of your business financial information so you can focus on executing.
Track key indicators
Keep an eye on key indicators. There are many ratios or indicators that you can track, so make sure you pick the right one for your business. Your business’ key indicators should track the aspects that drive your business revenue and expenses.
A Budget vs. Actual report is an excellent way of tracking the costs in your ‘installed’ capacity and keeping an eye on expenses you might have decided to keep at a certain level, such as advertising costs. You might have planned to spend a certain amount on ads. Still, after checking your Budget vs. Actuals, you might realize that the amount paid in Advertising is higher than the Budgeted.
Keep an eye on all expenses and make timely corrections to avoid depleting your business bottom line.
You can have a successful financial strategy around five principles:
- Know your margins
- Setting budgets
- Track key indicators
By getting a good grasp of these concepts, you will have a good start on your business financial strategy.