The concept of finance covers a multitude of activities including supervision of cash flow, the creating and maintaining of records, checks to see that the business is on a sound financial footing, maintaining a tight control over debtors and creditors, raising of money to finance operations or expansion and keeping in touch with finance personnel. The need to plan the finances of the business is of paramount importance.
UNDERSTANDING PROFIT & LOSS STATEMENTS
The figures you will find in your profit & loss statement do not always reflect the actual profit or loss. e.g. depreciation is not strictly speaking reflecting your actual profit and should to a degree be disregarded. Similarly one off expenses might well be disregarded when determining the actual profit particularly going forward as it can be anticipated that those costs will not repeat.
Click here for some valuable information on the profit & loss statement courtesy by Victorian Government.
MANAGING THE CASH FLOW
Just because the business is profitable does not necessarily mean that it will survive.
Attention must be given to the cash flow. Cash must be available to pay for the debts of the business as and when they fall due. It is not sufficient that the business is showing a profit. If for example the profits are represented by money owed to the business by its customers/ clients then a situation can arise whereby, because there is no cash available to pay its creditors then a profitable business can be threatened.
Click here for some valuable information on Cash Flow courtesy of the Victorian Government.
If the business has insufficient funds to service its day to day needs then it is said to be undercapitalised. This can have the following results:
*Stock acquisition in volume or at particular times when the prices are favourable or maybe at a discount cannot be financed.
* Stock is cleared at silly prices to cash up in order to meet normal financial obligations.
*Up-to-date equipment cannot be purchased.
To assist in determining the cash needs of the business, you should prepare a cash flow budget which tells you when money is coming in and when it is to be paid out. With this knowledge at your disposal you will be forewarned as to the times when payment must be made. At those particular times there may not be sufficient cash to meet payment obligations. In such cases, a short term loan/overdraft or factoring through reputable factoring financier should be arranged in advance to avoid a cash crisis.
Your business will have either an existing market or will have to make the market.
Click here for more information on marketing courtesy of Victorian Government.
The business must ensure tight stock controls exist to ensure stock is available to meet sales and to prevent pilfering.
No doubt competition in the market place causes an apprehension in business proprietors that if they do not give credit, they will lose business.
In granting credit the proprietor should be both careful and discriminating and be guided by the golden rules:
ºOnly give credit if it is absolutely necessary
ºMake a risk assessment beforehand
ºprompt follow up of overdue debt.
In the pursuit of this objective we should always be prepared to reject an offer of business from someone who is evaluated as risky. It is far better not to do the business than to do it and not be paid for it.
Arrangements with a customer are normally measured in terms of the time permitted to pay, i.e. 30 days. If that time is exceeded then consider our “no fee” debt recovery service for collection.
Many do not chase their money as they feel that it would upset the customer. Keep in mind that the customer has breached their credit contract with you and in doing so endanger your business by using up your valuable working capital. If too many credit contracts are breached by too many customers then you will either run out of money yourself or be forced to borrow in order to finance your business. In reality, the customers are forcing you to finance them.
Cutting busiess overheads
The simplest way to return a loss making operation to profit is by cutting costs. This is simpler than it sounds. Outsourcing is in large measure the answer. This is the age of an economic revolution and outsourcing is a part of it. It is the way of the future and with technology at the level that it now is it is also simpler. BizGuru our business partner has experties in providing super low cost back office support services. For more information please click BizGuru Pure Performance.