Guest Post by Emily Coltman
When you’re running a small business, keeping track of “the numbers” can seem either a daunting or a boring task! But it’s worth persevering with it, because knowing how much profit and how much cash your business is making can be crucial in helping you make the best decisions about your business’s future.
Emily Coltman ACA, Chief Accountant to FreeAgent gives five top financial habits of successful small business owners.
Keep your books up to date
Your records can’t give you useful information if they’re several weeks – or months – out of date. Wise was the man who said that you can’t drive by looking only through the rear-view mirror!
You need to have up-to-date, real time information in order to know how your business is doing. Using online accounting software will help you with this up to a point, but you need to do your part by making sure the information you post is timely and accurate.
Set aside some time each week to do your books and make sure that your information is never out of date.
Monitor your profitability – by total and by channel
Do you know how profitable your business is?
Keep an eye not only on overall profit but on the profit and cash that individual projects, products and channels are bringing in. Are you being too nice to all, or some of, your customers and not charging them enough? You’ll know when you look at your profit and loss account for particular projects and see that the profit figure is lower than you’d expected.
Make use of ratios and calculations such as profit margin (dividing your profit by your sales, so that you know how much profit you’ve made per pound of sales) to help you track whether you’re making the profit you hoped to.
Know who your slow-paying customers are
Keep track of how quickly your customers are paying you. There will always be some who take longer than they should!
Could you encourage them to pay any faster, for example by offering different methods of payment such as accepting credit cards, or by offering an early payment discount?
If you have chronic late payers then should they still be customers?
Be careful of having too few customers
Businesses who become dependent on a small number of large customers tend to have cash flow problems, because the customers can use their purchasing power to pay late, and there isn’t much other cash coming in to make up the shortfall.
If your business is in this position, could you increase the number of customers you deal with?
Plan your cash and be prepared for a rainy day
Make sure that you’re not just tracking what is happening now, but that you’ve planned what you expect to happen in the next week, month, year and 2 years.
When do you expect cash to come in? Could you take your business to a different market? When will you have enough to do that?
What if your best customer went out of business? Could your business survive without an injection of cash, or should you negotiate an overdraft facility with the bank now, so that it’s there when you need it?
Keeping on top of “the numbers” is a vital part of running a small business to make sure it not only survives but thrives!
Emily Coltman ACA is Chief Accountant to FreeAgent, who provide an award-winning online accounting system designed to meet the needs of freelancers and small businesses. Try it for free at www.freeagent.com