Know your numbers
What was your least favourite subject at school: English? Physics? Music? Chances are that many of you will have said Maths which is a pity since not only is this a fascinating subject, it also lies at the heart of much of what we need to do in day-to-day living, e.g. paying bills, budgeting etc. Since many people naturally shy away from mathematics these things are often avoided but in business, it is essential to ‘know your numbers’ if you are going to make your business a success.
Still, I do hear some business owners say that they don’t worry about their financials, they leave this to their accountant or their bookkeeper, but as a business owner, you simply cannot outsource this important function. Good bookkeepers will be able to record your financial data, reconcile your accounts and assist you with BAS and IAS payments and good accountants will ensure that your business complies with your legal obligations and minimize your tax liabilities, but neither can actually manage the financial decisions that affect the growth, development and profitability of your business.
The good news is that this does not in practice turn out to be a hard thing to do and whether it is done or not is very often more a function of the business owner’s confidence in their financial abilities rather than any particular skill in this space.
For me, the place to start is to define a budget. It never ceases to amaze me how many businesses do not have one, but not having a budget is a bit like setting out on a new journey without a map; you may not arrive at your destination, but even if you do, chances are it will take longer and cost more than if you had planned a direct route in the first place. What’s more, when you set a budget, you now have a way of measuring and tracking your progress against a defined financial plan and as the highly regarded management consultant, educator, and author Peter Drucker once said: “What gets measured, gets managed”. Whilst you could set a budget by hand, far better to do this inside a tool like Microsoft’s Excel which enables automatic calculations or indeed use any of the financial tools like Xero and MYOB which these days also allow for the creation of a budget.
Another argument I hear for not creating a budget is the view that you cannot predict your sales, so what’s the point in trying to set a budget for these? In practice, this view does not tend to hold up since if you know your sales over the past few years, chances are you can estimate to within a rough order of magnitude what they are likely to be over the coming year. You may not know exactly which customers will spend what but looking back at what has happened in the past, you are likely to see patterns emerge that will enable a reasonable level of forecasting for the coming period.
Expenses are a whole lot easier to predict since overheads such as fuel, heating and lighting costs etc typically don’t differ wildly from the previous year. The biggest expenditure is usually wages so if you have an idea of the number of staff you will need over the coming year and have collected data on the other expense items, it is not hard to extrapolate figures the new financial year. Knowing your forecast sales, the typical ‘Cost of Goods Sold’ for your business sales and your forecast expenses, it is then easy to calculate your forecast profit. I recommend doing all of this month-by-month for the coming year so that you can compare your actual figures with your budgeted amounts each month and hence get early visibility if you are going off-track.
If you are still not confident, perhaps try enlisting the help of someone who can assist with this since being able to build and interpret your own ‘financial roadmap’ and plan your business’ financial future is vital to sustained business success.
If you live in or near the SE Suburbs of Melbourne, we are running a useful 2 hour seminar you can attend on either 30 or 31 March 2022 at 6pm.
Ian Ash ACC, AInstIB
Managing Director OrgMent Business Solutions - www.ombs.com.au