Keeping a finger on the financial pulse of your home business

Good financial management throughout the year gives you a clear picture of how your business is doing, helps you set financial goals and plan budgets and makes handling the necessary administration for your financial year-end easier.

A home or small business often does not need much more than a cashbook in place to record income and expenses, and having an effective, easy-to-use computerised one will make all your administrative tasks - such as GST returns and preparation of end-of-year reports for your accountant - much quicker and easier.

Apart from just staying on top of cashbook entries though, it's important to understand what's happening in your business financially. You need to be able to work out how much you are selling on a daily, weekly and monthly basis, and what expenses you are incurring in doing so, what your overheads are (even when you are not selling anything), how profitable each of your various business activities is, and which customers are actually costing you money! When you have this kind of information available, you can choose more effectively what to focus on and where you need to troubleshoot before financial problems really manifest themselves.

Understand the money in your business
New businesses are often happy to be chalking up sales and can't understand why they never have any money available! It's important to understand the difference between turnover (how much money comes into the business), profit (how much is left over after all the bills are paid) and cashflow (how much money you actually have in hand to pay your expenses as they arise). Many a business owner has found after analysing the relationships between these that a business activity which contributes proportionally more to turnover is not as profitable as one which on the face of it appears less financially rewarding, or that signing up lots of sales contracts with long payment deadlines may seem worthwhile in the longer term but leaves the business unable to pay creditors in the interim.

Every business should be using financial data gathered during previous business years to plan for the next. If the business is highly seasonal, or there are large expenses (including tax) falling due at one particular time of the year, these need to be taken into account. Forward planning for small or home businesses should at least include a cash flow projection and budgets for both income and expenses. While many home and small businesses do not have these, they not only form the backbone of good financial planning, but having sales targets can be a worthwhile motivator, while having budget set aside for marketing, training or new equipment enhances the professionalism of the business and empowers the owner to make effective decisions.

Analysis of your financial data is helpful in assessing whether the business is helping you achieve your goals and how well you are doing compared to previous years, your expectations or perhaps even to other similar businesses. There are a variety of useful ratios which can be used to interpret the financial health of your business, whether it is providing a worthwhile return on the investment of your capital and time, and so on. These are beyond the scope of this article, but your accountant - or even a good business book - will be able to help you work these out.

Work with your accountant
And on that topic, it's worth finding a good accountant and making them your business ally. Many home and small businesses see their accountant as a necessary evil - someone who they can't do without but who charges an exorbitant rate for which they see little return. A good accountant can advise on the most suitable structure for your business, help you understand what's happening financially, what parts of your business are profitable, make suggestions to enhance profitability, and work with you to ensure you have the data you need to find out how you are doing on a daily basis. Investing in good advice can have a positive impact on your bottom line that far outweighs the cost involved. Finding an accountant who is right for you and your business may take a little time though - be prepared to talk to several, and ask lots of questions before making a decision. Ask what they can do for your business and what kind of businesses they like to work with, and what kinds of fees will be charged for the kinds of advice you would find useful. You'll know soon enough when you've found someone who will be interested in your business and work with you to maximise your return.

You'll find running your business more satisfying as you begin to gain a clearer understanding of the finances, you'll feel more confident making decisions and you'll know sooner if you're heading for trouble so you can take corrective action. All in all, you'll find that keeping a finger on the financial pulse of your business really will pay off - quite literally!

Topics: 

  • Finance

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Heather Douglas's picture

I started Bizbuzz (or HomebizBuzz as it was called then) in 2000, when I worked from home and realised there was nowhere for home businesses to find relevant information, nor a community of like-minded people to tap into for support, or just a chat. A few years later, Smallbizbuzz was born, and...