We all have some relationship to money, and it is usually instilled in us from childhood. There was always more than enough or we never had any money. There was always a budget in our house or we spent money when there was any available. Many of us had nightmares from high school algebra and accounting and to this day shy away from anything to do with math.
Unfortunately, this relationship you have with money will also influence the way your employees relate to money in your business. By setting the example of financial management in your business, your employees will simply follow suit.
Most business owners are of the opinion that they can’t perform financial management as they were never great at math. If you however look at the way in which we manage money,
[highlight]Income – Expenses = Profit[/highlight]
You will find that the concept is no more difficult than primary school adding and subtracting.
If you get confused by all the accounting terminology and that keeps you from properly managing your money, get your accountant involved.
Managing money in your business is nothing more than financial management.
What is financial management?
Financial Management is the high-level planning and defining of financial results and managing money to those results.
So bookkeeping and tax compliance are therefore seen as technical work and not actual financial management.
Financial management is therefore not the responsibility of your accountant, as most accountants deliver their services up and till you are tax compliant.
The danger here is that a business owner that is not comfortable with financial management will make assumptions that his/her accountant is actually ensuring that the business remains on track. The same goes for the accountant that is not comfortable with the financial management side of things. He co-signs on the business owners feeling towards financial management and inherently they agree to not attend to it at all. Subsequently, no one is filling the role of Financial Director in that business.
We have to highlight the role of your accounting firm when it comes to financial management for your small business.
Always remember that your accountant works for you. You need to clearly define the results that you need from your accountant and at which intervals those results have to be delivered.
What does it mean to manage by the numbers?
- You have to budget. Forecast your income and expenses for the 12 months ahead and track your actual figures vs. your budgeted figures on a monthly basis. Don’t expect this to be perfect! As this is a prediction of future events, bear in mind that no one can 100% accurately say what will happen and when. You can therefore feel really proud of yourself if the actual figures are within the 5 – 10% range of your budgeted figures.
- Understand the difference between profit and cash. This is a very important concept as it will influence the way in which you budget and will ultimately determine the rate at which your company is allowed to grow. Many of our clients still ask the following during our monthly meetings. I have made a profit of R60,000 on the income statement but where is the money? It is critical to understand that the income statement is ultimately your profit and loss statement to calculate your income tax exposure to the Receiver of Revenue (SARS). Certain non-cash flow items like depreciation pass through your income statement lessening your profit, but not your actual cash at hand. Also keep in mind that your income statement is drafted on the accrual principle which means that an entry is captured on the invoice date, regardless of whether it has been paid or not, hence it does not take into account any amounts still owed to or by you.
- Understanding direct costs vs. variable costs. Fixed costs are those items that remain the same each month and can easily be predicted for the 12 months ahead. These are usually items such as rent, accounting fees, subscriptions, etc. Variable costs are costs associated with delivering your service or producing your product. The more you produce the higher your variable costs. The fewer services you offer, the less your variable costs will be. It can therefore be seen that variable costs are directly linked to the output of your products or services. You will not attach a fixed rand value to variable costs when you budget, but rather a percentage that variable costs represent of your turnover. You will subsequently try and reduce your variable cost percentages to increase your profitability.
- Having courage or hope. Hope and money are a very dangerous combination. Merely hoping that everything will be ok and that there will be enough money at month end to cover all the overheads or trusting that your customers will pay in time, might get you through a month or so, but is unfortunately not enough to ensure the survival of your business. Face your fears. Ask your accountant the questions you need to better your relationship with money.
Do you have any real-life stories to share with our readers of how your relationship with money affected your business – good or bad?