Craig McCulloch, Partner at Prime Strategies Group (pictured), imparts his advice with the five financial principles you need to understand and implement for success.
If you are starting your own business or becoming a business owner, you are in for a great experience, but it is crucial that you take care of some important financial basics right at the start. This will help prevent you from coming a business statistic.
- Develop a profit and loss budget based on your business plan. If you have not done a business plan, work on this first as this will determine the revenues you can expect and the costs, both direct and overheads, associated with supporting the projected revenues. Remember that a profit and loss budget is GST exclusive and does not include items such as GST payments, tax provision payments and capital expenditure. It is a forecast that helps you understand gross profit margins and business profit, and is useful for benchmarking and measuring costs.
- One of the more important financial forecasts for a business is the cashflow forecast. 90% of businesses that fail are profitable, but they just run out of cash. A good cashflow forecast is based off a sound profit and loss budget. However, depending on the type of business you are in and whether you provide credit facilities to your customers, will determine if you receive cash in the month invoiced or the following month. This is also the same with your costs. Wages and salaries are expensed in the same month, but you may not pay some products or other bills until the month following. Cashflow forecasts also show when you need to pay GST, tax and asset expenditure. This will clearly show how much cash you should have in the bank each month.
- Establish your working capital needed. Once you have your cashflow forecast developed, you can then more accurately estimate the working capital you will need to sustain your business. Again, this depends on your type of business, but with a products or manufacturing business, working capital is needed to sustain the period of time you have to cover the cost of products and wages until you get paid by the customer. You also have to ensure you have enough cash in hand to pay standard costs such as rent, power, insurance etc.
- Determine your break even point. In a start up business, it may be some time before revenues have built up enough to cover all associated business costs. Understand how many months could run at negative cashflow as you will need to have enough initial investment cash to cover these.
- Think about an investment partner. It is a real shame if a good business idea does not proceed due to a lack of initial cash. However, choosing the right business partner is tricky. First and foremost, make sure their vision aligns with yours. Determine their involvement – is it just for returns from investment or do they want to be fully involved? Most importantly, put a comprehensive shareholders agreement in place that clearly covers everything to do with the business partnership arrangement.
Having your own business is a very exciting prospect and it will be one of the most challenging things you have done. With the right planning and knowledge, it will be extremely rewarding.
Taking care of the financials is one important step to ensuring success in your business, but there are many other areas that are of equal importance. A good business consultant has the experience to assist in all aspects of business best practice and I would always recommend a new business owner to engage support early.
If you would like any further information on any of the points above or assistance with other business areas, I or one of the other associates would be happy to meet and discuss. You can contact me here.
If you’re a new business or starting out on your own, you can also find out more about our one-hour of free business advice here.