Managing finance is an integral and critical aspect of business success. Without funds to invest, an organisation is unable to sustain operations, invest and create wealth. All businesses need to forecast cash requirements, invest in equipment, tools, products, processes and in human capital (people). It is well understood that adverse cash flow is more likely destroy business rather than low short term profitability. Any new business needs to build cash reserves as quickly as possible both to allow investment and also to buffer any temporary adverse cash flows. It is prudent to prepare financial forecasts for profit & loss, balance sheet and cash flow. Having an insight into future financial needs is a powerful business tool and also provides a time window to source investment funds. Business leaders who maximise income and minimise costs usually succeed. Regular and diligent sales billing, expediting debtors and careful management of expenditure can maximise profits. Remember, it’s not a sale till the money is in the bank!

One aspect of financial management that is often overlooked by new and small businesses is the determination and monitoring of gross profit margin. This is a critical measure for many businesses and should be recorded and analysed for trends. Using gross profit in conjunction with operating costs allows break even to be established. Break even can greatly aid the determination of business viability. A reducing profit margin in the absence of reduced overhead costs will require additional sales to maintain profitability.

Establish financial performance indicators and ensure that they are relevant to performance, easy to collect and regularly reported and analysed.

Some points of wisdom
  1. Learn about finance.
  2. Create financial plans that identify profitability, investment needs and cash flow.
  3. Rigorously monitor gross profit margin to identify any adverse variances and trends.
  4. Identify the “vital few” costs that represent most of your expenditure and ensure that they are carefully controlled.
  5. Exercise meticulous control of debtors and creditors and maintain a positive cash flow.
  6. Know and understand the value of your break even sales.
  7. Aim to generate cash reserves and to avoid unnecessary debt finance costs.

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