The Essentials you need for successful management of the financial aspects of your business. First of 4 blogs.
1. Basic Financial Aspects in Every Business
2. Financial Statements – Critical Information on Which to Base your Decisions
3. Getting Value for your Manpower - Tracking and Forecasting
4. Business Control Gauges - Monthly Management Report
Most small business are started by technicians that are struck with what Michael Gerber calls ‘entrepreneurial seizure.’ These technicians excel at their craft, as employees. It occurs to them that the next logical step in their careers is to launch their own business. The problem is that very few of these technicians, if any, have the expertise to start and run a successful business.
Not long after starting their own business, do they realize just how many skills they lack when it comes to running their newly minted business. One the six essential aspects to running a successful business, is finances. When working for someone else, all these technicians had to do was deposit his or her pay check in the bank every two weeks. If they were somewhat prudent with thier money, there was nothing to worry about as pay day, at most, was just two short weeks away.
Now, for these new to business, there are a myriad of financial tasks to look after, knowledge to gain and decisions to be made regarding the companies financial welfare.
A business owner must manage these financial considerations, being wary of the pitfalls that each aspect can present, if not properly attended to.
I’d like to go back when I began in business. To begin with, I handed all financial aspects over to a secretary who was fresh out of Business College boasting only a limited background in finances. I deferred to her judgment on matters pertaining to the business’s finances, because most of the time, I was just too busy. Scary! Today, I shake my head when I think of handing this critical aspect of running the office over to a novice secretary. I learned the hard way the importance of well-run finances in a business.
Components of Corporate Finances
There are several components to corporate finances, and I will describe them in the following list, with some of the pitfalls I encountered along the way while developing my own business.
Easy enough! Receivables can be defined as a list of all the invoices sent out for completed work. Most clients pay promptly; however a small faction of clients drag out payments so collection of the money you need to run your business and to pay staff, becomes a not-so-pleasant task.
Revenue refers to the income earned by the company’s sale of goods and/or services. When there is more revenue than expense there is no problem. However when your expenses exceed the income, it results in a huge problem that will need to be resolved in short order.
The list of bills that are incurred in the process of doing business; payroll, rent, supplies, equipment, utilities, etc. Again, there should be no problem in paying for expenses. As long as clients are not late in payment of their invoices, you can avoid a cash shortage situation, which is another not-so-pleasant situation to be in.
Bills incurred in the process of doing business. Expenses are often broken down into two categories: fixed expenses that occur each month such as rent, payroll, lease payments, etc. and variable expenses, which are those that are one time expenses such as purchase of supplies and equipment, etc.
This is defined as the money remaining – revenue minus expenses – before tax calculations. This is your most tangible metric (measure) of business success.
Each employee expects an agreed to salary on an agreed-upon schedule.Having the funds to cover the payroll is a daunting task month-after-month, year-after-year. The government requires each employer to keep records on payroll details including deductions for income tax, employment insurance, etc. These deducted monies must be submitted along with payroll records, monthly.
Each business is required to make tax payments – income tax, GST and other taxes required regionally. Depending on the nature of the business, tax calculations can be a complex process.
This is a sum of money put aside by the business in the case of a temporary shortfall in cash required to meet the business expenses. It is critical to have a buffer in an architectural business, as your firm’s income can vary greatly from month to month.
In business it is prudent to develop a relationship with a banker who understands the nature of your business. A banker will help facilitate the cash and cash flow challenges faced in your business.
This is a loan on a revolving basis to cover short term financial needs. The business draws from this LOC as required and repays the amount used as soon as cash is available. Details of the LOC are worked out with the banker depending upon the nature of the business.
A bank loan for a major purchase which is usually set up to be repaid with interest on a monthly basis until repaid.
A bank loan for the expenses incurred in starting up a business or a new division of an existing company. This loan is usually taken to cover equipment, furnishing and the supplies required to conduct business activities. To begin with, only the interest on this loan is paid monthly for an agreed-upon time, after which the loan is repaid on a set monthly payment schedule.
In the course of providing services to a client, expenses are incurred to carry out their project. These expenses are billed back to the client on a monthly basis along with proof of purchase.
This is insurance covering loss due to fire, flood or other mishaps of nature. General insurance may also cover loss due to the suspension of work due to a situation beyond control. Public liability is also often included in a general insurance policy. Your business will have its own unique needs, which need to be thoughtfully negotiated with your insurance provider.
This policy covers liability created in the course of providing services to a client. It covers claims due to error, omissions or negligence. It is prudent for a business to be well informed on all the conditions and requirements surrounding this insurance.
The above are brief descriptions of the main financial aspects of any business. Detailed knowledge and carefully maintained records will help the business avoid any associated pitfalls. As any new business gets going, systems should be put into place surrounding all of these financial aspects. These systems will ensure effective and efficient means to manage this aspect of your business so you can get on with the day-to-day aspects of client fulfillment.