10 components for success in business – part 1
What tools do I need to run my business?
Your understanding and correct use of the available business tools will determine how far the business goes. Regardless of size, every business needs tools to setup, administer and properly run. Some of those tools are purely financial in nature. A fair understanding of finances is necessary for every leader regardless of profession. You ignore your financial performance at your own peril. You are able to make better, informed and calculated risks or decisions whenever you know the financial implications. Every decision you will ever make has a financial implication; it will either increase your financial position or reduce your financial balance. You should never be surprised why and how you seem not to have enough money for your needs when you are not able to monitor income and expenditure patterns. This article may not make you an accountant or finance manager but it is meant to give you a few tools that are pertinent in giving you some grounding on the subject of finances. Other business tools are covered which when made use of can maximize the potential of the business .
1. Knowledge of Finance Basics
I will highlight the few financial tools. I also recommend such courses as Finance for Non-Financial Managers. The points below will give you a jump start and possibly give you enough appetite to go a little deeper.
Sometimes referred to as Profit and Loss Statement Profit is the money you remain with after trading or selling your merchandise. It is the sum up all your sales invoices (income) minus all costs involved in the sale. The balance is a gross profit. In situations where you find yourself without money enough to finance your costs, we say you made a loss. A loss making position will drive you out of the trading position sooner than later. Every wise CEO always endeavors to lower the costs of production as much as possible so as to make goods and services affordable and competitive in pricing. That way you are able to sell volumes which increase your profitability. A profit and loss statement will include Total Sales (T), Cost of Sales direct costs(C), Gross Profit (which is simply T minus C). You also have Operating Profit which is profit before interest and taxes (PBIT). When you have removed all the interest and taxes you come up with Net Profit or Net Loss.
Every business has a prerogative to generate cash. A cash flow statement will show clearly what happened to the cash you have been generating. Cash refers to hard cash which is Cash on Hand, petty cash, and cleared funds in the bank as well. I am saying cleared because you can not make a decision on money which is not yet reflecting as available. What if the cheque bounces, or transfer is reversed? I used to value the Profit and Loss statement more than this until I realized that this statement tells me whether I am generating cash or I am simply consuming it all up. It is important to note that even though you may be having a profitable position according to the Income Statement above, you may be using up all your cash and soon face the wrath of bankruptcy.
This is the document that shows us our asset levels. Whenever you purchase assets for your organization, the value should be recorded as per invoice. Over a period of time the asset goes down in value (depreciates) or it may increase in value (appreciation). It is important to keep a track of this value as it helps you to know when to replace the asset. A balance sheet will inform you about the value of the business . It is tragic to judge a business by the bank balance as all that could be funds waiting to be paid out. A balance sheet includes fixed assets such as land, plant equipment, vehicles and current assets which include cash in bank, stock levels and what customers (debtors) owe. The two asset types added together give us total assets we have. It also includes the company’s financial obligations (liabilities) which may be classified into long term liabilities (loans payable after long periods e.g. 5 year loan) and current liabilities (short term loans, what is owed to suppliers / creditors). In addition you need a record of all assets with their serial numbers and values in a book called Asset Register.
This is a financial plan which shows a projection of where we expect to get funds from and where we also expect to spend. A budget is a wise inference made based on studying previous behavior. It helps the leaders to manage costs. In well managed businesses , they will not spend on what is not budgeted for. Where expenditure surpasses budget, the respective department has to answer questions such as why? How come? What can be done next time to stay within budget? A comparison of budgeted versus actual figures is always important at the end of each month. Since a budget is a forecast of future performance, there is need to know the historic performance of a company especially in the recent past with consideration of any changes in the environment. A budget can only be useful to the degree it is realistic and reflective of the economic environment the company operates in. The budget tool is a useful tool for every leader. Get everyone section, division or department come up with their own budget which you consolidate to the main corporate budget.
… continued in part 2
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