5 Reasons to better understand your finances

As the old and new financial year transitions, it’s a good time to reflect on the importance of understanding your finances to better manage your:

  • Profitability
  • Business Growth
  • Debt levels
  • Strategic business decisions

Understanding the finances in your business is important for any business owner - regardless if you're a 'numbers person' or not. Realistically, finance is often the weakest skill set of most business owners, who are usually risk takers and entrepreneurial by nature. Finance may not be the fun part of running a business, but it certainly makes part of the backbone of the business.

To have a resilient, reliable, successful business you must understand the financial fundamentals.

  1. Knowing if you’re profitable - financial success is the key measure of success. If you don’t fully understand your business’s finances, you may not be able to tell how you’re really performing, i.e. you may think you are profitable but in reality you are not – and it’s during tax return season that you get a nasty reality check. Latest digital technology (cloud accounting) allows you to do bookkeeping online and access daily summaries of your full financial position – so no nasty surprises and better informed decision making throughout the year. And it’s easy! So, don’t be scared to talk to your business adviser about it.
  2. It’s essential to growing your business - most business owners would like to expand their business to make more money and compete at a higher level by developing new products or services, hiring new staff, investing in technology, buying another similar business or setting up a second or more outlet. You can’t expand unless you know the state of your finances. Current figures, break even benchmarks, sound budgets and forecasts all help to make reliable decisions about growth.
  3. Identifying what's working and what isn't - knowing exactly which products and services are your most profitable, and which provide the best return on investment (ROI), means that you can discontinue those which are unprofitable/weak ROI, and expand on those which are performing well. As a business owner, you need to be across current trends, conduct regular market research and have your business set up to be flexible and responsive to market forces.
  4. Information is power – your business will have ups and downs by season and over the years, and your profitability and debt will vary with that. What’s important is being able to recognise these trends and why, planning your finances around this, and stay on a planning path of constant improvements. As the owner, you need to know everything that is happening in your business at all times. You don't have to do everything (e.g. employ or outsource the bookkeeping, use a quality business adviser), but the bottom line and whether you profit or not is your responsibility. So, don't concentrate on the parts you enjoy and avoid the parts you don’t enjoy. Get help. Whether that's producing income, getting better terms with suppliers, having clients pay faster or simply budgeting and forecasting your cash flow.
  5. Cashflow is king – profitable and successful businesses can fall over due to a cashflow crisis, regardless of how much you have sold or how much you are owed. If you don’t have the finances to pay creditors and your bank, your business can very quickly slide into “trading whilst insolvent” – which is illegal!

As a business owner, you should be able to answer simple questions about your finances. Get your Business Adviser to set up a ‘digital dashboard' of KPIs (key performance indicators) relevant to your business, which should update daily for you to look at. Your Business Adviser can also run monthly financial reports and projections to look at and modify your budget accordingly, and, each quarter, look at your business’s performance to review seasonal and annual trends from previous years to compare, track and monitor.

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For information on trading whilst insolvent please call 5224 7700. There are at least 18 ways to improve cashflow and better manage debt. Call for a copy of our checklist.

A range of helpful articles are located on our website under Insights at www.crowehorwath.com.au or visit the Small Business Victoria website.

Material provided is information only and should not be relied or acted upon without seeking professional advice relevant to your specific circumstances. Information is provided under Crowe Horwath (Aust) Pty Ltd ABN 84 006 466 351.

Josh Easton
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Josh Easton, Associate Partner, Business Adviser, Crowe Horwath Geelong office
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