Understanding your business finances is essential to the growth of your business. Even if you’re at a stage in your business where you’ve reached success it is imperative to have basic knowledge of financial forecasting and planning for the purpose of sustainability and growth. Here are 4 important money tips every small business owner should know.
What is your “Break even” point
Most business owners have no idea when they’ll break even in their business, let alone when they’re expected to make a profit. When creating your business plan, include a “Break even Analysis” when calculating your budget. A “Break even Analysis” will help you to determine when your business will expect to make a profit. The break even point is when revenue equals sales, meaning, when you earn enough revenue in your business that will cover your expenses, while earning a profit. According to the SBA to calculate your break even point, you will need to identify your fixed and variable costs. Fixed costs are expenses that have little to do with sales volume, and everything to do with costs such as rent and administrative salaries. These expenses must be paid regardless of sales, and are often referred to as "overhead costs". Variable costs fluctuate directly with sales volume, such as purchasing inventory, shipping, and manufacturing a product.
Credit vs. Cash
Credit vs Cash. Sounds rather “simple” right? Think again, knowing when to use credit for making purchases in your business vs. cash is key to effectively managing your business finances. Most small business owners think “I’d rather have cash than credit”. Actually, running a successful business requires you to have both. For example, with credit, you have access to funds that aren’t readily available such as cash. During the startup phase of your business, cash can be “scarce”, sales takes time to generate. Credit may be your next option. It’s best practice to preserve as much cash as possible in the event that your credit lines are maxed out, or if the bank decides to cut your credit line down from its original credit limit. These unforeseen circumstances can leave you cash strapped if you aren’t prepared.
Make it a habit to monitor your expenses regularly
How often should I monitor my budget? I strongly suggest that you develop a habit of going over your budget at the end of every month. This will help you prepare for the following month. You can better track your inventory, shipping, and manufacturing costs. Adopting an ongoing process where you review your budget monthly will also help with predicting future sales, what you need to cut back, what services and products are doing well and which ones are not performing as expected.
Hold off on making large purchases
If you must make a large purchase, make sure it’s something that is a “must have” item for your business. Also, consider the timing of the purchase. You don’t want to purchase a “big ticket” item prior to your sales declining due to seasonal changes. Remember, always monitor your budget to ensure all of your expenses are in order.
The one thing small business owners fail at in their business is with money management. Some will “jump” right into a business idea without analyzing the costs associated with not just starting a business but maintaining it. It is imperative to the success of your business to know when your “break even” point is in your business, when to use cash and when to use credit. Hold off on making large purchases. If It’s not necessary to buy it, don’t. For a complete breakdown of how to budget, manage and track your expenses, visit The Success Shop and pick up your copy of The Fundamentals of Budgeting and Money Management Small Business owners guide. Comment below and tell us what are some of the money habits you've developed in your business.