Get Financially Fit
Your ability to manage your business effectively will be largely determined by the completeness and accuracy of the information you have about your current business activities. Successful entrepreneurs are very aware of the important numbers that determine the health of their businesses.
Fortunately today, with modern computer technology, it's easier than ever to set up a management information system that enables you to get the financial numbers you need to make better business decisions.
Managing Your Information
The quality of your information will determine the quality of your business. You can only make good business decisions if you have excellent data that you can refer to on a regular basis. Setting up a management information system for your business is central to your long-term success.
The best time to set up an accounting system is before you start your business. Prepare a complete business plan in advance of starting your business with clear sales goals for every day, week and month. Estimate expenses in every key area and project your expected profitability (or loss) for every month.
There are specific kinds of financial information and numbers you need to manage your business. Like the vital functions of the human body, these critical success factors determine the health of your business.
One of these keys to business health is determining your cash flow. Add up your total sales revenues each day, week and month. Determine the number of individual sales you're making in each time period and the average size of each sale. Look for trends in each of these numbers.
Analyze the quality as well as the quantity of your sales. Determine the gross and net profit you're earning on each sale and the profit you're earning per customer. Analyze the trends in these numbers.
Know Your Numbers
There are certain numbers you should know at the end of every business day:
- How much cash do you have in the bank or on hand?
- What were the exact sales for that day?
- How much money was received that day?
- How much does your company owe to suppliers?
- How much does your company owe to the bank?
- What's the value of your inventory and goods on hand for sale?
- What's your daily net worth after deducting all amounts owed and payable?
Your daily financial statements will combine together to create your monthly financial statements. Once you have these, ask yourself:
- What were your total sales for the month?
- What were your total costs and expenses for the month?
- What are your exact profits or losses for the month?
- What is the net value of your business at the end of the month?
- What are the trends in these numbers?
Keep a close eye on the cash coming in and out of your business. Be aware of cash inflows and outflows on a daily basis and keep this advice in mind:
- Payment from customers is critical for cash flow. Determine the amounts owed to you by customers every day and speed up collection of sales revenues as much as you can.
- Be careful about granting credit to new customers. Have very clear terms of payment for your sales and move quickly to demand payment from a slow-paying customer. Insist upon cash in advance if there's a possibility of non-payment and request a 50-percent deposit on all orders before you spend time and money to produce or acquire the product.
- Know how much you owe to your bank and other suppliers or vendors. Require a monthly breakdown of the amounts payable to your creditors. If you're short on cash, delay and defer payment whenever possible. Preserve cash at all times.
- Personally approve or authorize all expenditures before they're made. Don't allow anyone but yourself to sign checks or to authorize expenditures. Watch the money in your business carefully--no one cares about your business or your money as much as you do.
- Always have a complete picture of the financial health of your business. Update the financial results of your business every month. At the end of each month, compare your projected sales, costs and profits with the actual results. Look for variances between your projections and the actual amounts earned or spent. When necessary, act immediately to make additional sales or cut costs.
Most entrepreneurs aren't particularly good at accounting or financial statements. Fortunately, you don't have to pay attention to every single financial detail of your business. You can hire a bookkeeper or accountant to do this for you.
To be successful, you must know the critical success factors and key numbers of your business every day, week and month. You should take time each day to evaluate your progress. You should take time each month to study your financial statements and the overall health of your business.
Most importantly, you should study both the variations from projections and the trends of the numbers in your business. Large variations between your projected numbers and the actual numbers indicate a poor understanding of your business. Ignoring a downward trend in your sales or profitability can be dangerous to the health of your business over time.
Brian Tracy is the "Success Secrets" coach at Entrepreneur.comand one of America's leading authoritieson entrepreneurial development. He's produced more than 300 audio and video learning programs that cover the entire spectrum of human and corporate performance through his company, Brian Tracy International.