Achieve Break Even: A Guide to Money Mastery and Avoiding a Cash Crisis
A new year and many businesses are facing the challenges posed by an uncertain economy and rising costs of living. In this environment, it is more critical than ever to have a firm grip on your business finances.
However, many small businesses tend to overlook this aspect, possibly due to a lack of confidence in money management. But, to ensure the survival and growth of any business, attaining money mastery is crucial.
Where to Start?
Getting a handle on your accounts history is a good place to begin. Reviewing your revenue and expenses over the past month, quarter or year, should provide a clearer picture of your business, and you can use this information to make future predictions.
It is important to note that the last couple of years have not been typical for many businesses due to the impact of the Covid-19 pandemic. So it’s advisable to look back before the pandemic to gain a more accurate financial predictor.
Real Costs
Inadequate information often results in poor business decisions. Hence, it is essential to keep a real-time eye on your numbers and deal with actual costs when making projections. If you plan to make an investment like a marketing campaign, capital equipment or new product development, you need to have a clear understanding of the costs involved and the expected revenue and payback period. Knowing your data will help you make better decisions.
Key Performance Indicators
To manage your finances effectively, you should be tracking your financial key performance indicators (KPIs). These numbers will give you an idea of what’s happening in your business. If you want to manage something, you must measure it. Measuring your KPIs on a weekly or monthly basis will help you stay focused on those numbers and improve your results.
Vital Signs
Here are some business vital signs to look out for:
Revenue: Monitor your revenue and determine if your sales are increasing. Plan for seasonal effects that may produce changes quickly in fast-moving industries.
Profits: Know your profits and make sure they are increasing. Tracking your profits month by month will help you avoid surprise losses at the end of the financial year.
Cash Flow: Keep a close eye on the money flowing in and out of your business. Remember, many businesses fail due to a lack of cash, not a lack of profit.
Equity: Ensure that your business is gaining value. Keep track of the worth of your business in case you want to sell it in the future.
Ratios: Pay attention to ratios, such as gross profit margin, days sales outstanding and revenue per employee, which focus on how different factors relate to your revenue.
Non-Financial Measures: Don’t forget to monitor non-financial measures like customer satisfaction, sales pipeline, operational efficiency and team engagement. These all play a role in your business’ success.
When Do You Achieve Break Even?
It’s crucial to be aware of your break-even point, especially this year, to avoid ending the year with a loss. Your break-even point is where your revenue exceeds your total costs, meaning you are making a profit.
Fixed costs, such as rent, staff salaries, subscriptions and accountancy support, will incur regardless of your sales. Variable costs like raw materials, sales commissions and shipping will vary based on your sales. The proportion of fixed and variable costs will depend on the type of business you have.
Track your break-even point weekly or monthly to ensure you are operating above it and making a profit.
Beware of Cash Shortages
A critical aspect of financial management to keep in mind when finances are tight is identifying and managing a potential cash gap.
If you are in the manufacturing industry, a cash gap may occur due to a timing discrepancy between purchasing raw materials and receiving payment for the final product. This period can range from a few weeks to several months, depending on supplier terms and invoicing practices.
If your business is growing rapidly, you may find that you are incurring higher costs for increased volume of raw materials and labour before the income you are generating, which can lead to a cash gap. Service-based businesses can also face this challenge, for instance, when paying salaries before receiving payment from clients.
To prevent a cash gap, it’s crucial to first determine if you have one and then strategise ways to narrow it. This could include negotiating longer payment terms from suppliers and reducing credit offered to clients. Matching your expenses with a consistent stream of revenue is also essential to maintaining financial stability. Keep in mind that a cash gap may not always be apparent, so it’s important to regularly monitor your business finances.
In conclusion, mastering your business finances is crucial, especially during an economic downturn. Don’t delay in taking control of your money! Contact ActionCOACH Chilterns today to take positive action. We offer a range of business coaching programmes to suit you and your business, and you’ll also find plenty of free learning resources on our site.
We work with clients all the time, helping them to become more confident when it comes to gaining money mastery and being on top of their finances. If you would like help with this, please email us or call us on 01494 211 671 for more information.
