Of the three keys to business success, financial management is often the most feared among entrepreneurs. Even if you don t consider yourself a “numbers person,” keep in mind that the down and dirty reality of running a business is in the numbers. If the business isn t profitable, it won t last long. Managing finances the right way is actually not that complicated, especially with the tools available, but is a critical factor in the success of any business.
There are a few things to think about before starting your business that will simplify the financial management. There are several accounting software programs on the market that cater to small businesses. Although Quickbooks by Intuit is currently the most popular and is very easy to use, Peachtree Accounting by Sage is a better choice for any startup with intentions to grow. Peachtree is just as user friendly, and includes some less than obvious features that make it the best choice.
Peachtree is completely GAAP compliant, meaning it meets or exceeds all generally accepted standards for accounting. Quickbooks is not, and when you need to produce financial statements for banks or investors, you will likely need to pay your accountant to clean up the books before you present the numbers to anyone. For a growing business, the basic Peachtree program significantly outlasts Quickbooks, in terms of how soon you will need to pay to upgrade and add users. In addition, once your company reaches the point of needing a comprehensive, enterprise accounting system, only Sage offers an appropriate product. Thus, switching over from Peachtree to the Sage enterprise accounting product is relatively streamlined, while switching from Quickbooks to any appropriate system is a greater hassle (and a greater expense).
Managing your business finances is, of course, more than just keeping the books. Successful entrepreneurs schedule periodic reviews of the basic financial statements to identify opportunities to improve profitability. They calculate basic ratios and learn what they mean in comparison to both the business s past performance and to the available industry averages. With the accounting software now available, these tasks are far easier to complete than ever before. The basic financial statements can be produced with a few clicks of the mouse, and learning what the numbers mean is not as complicated as most people think.
A third key component of financial management is forecasting and budgeting – essentially future planning for financial management. Many new entrepreneurs have trouble with these processes, electing to simply up their previous performance by a standard percentage for each new year, if they bother at all. In fact, forecasting sales and expenses and setting budgets for various aspects of the business should be completed periodically in the same manner as good startup forecasts are developed, considering any changes and anticipating any threats or opportunities along the way.
Good forecasts allow you to be more flexible in, for example, your marketing efforts. If you have a clear sales target, you are more apt to evaluate the outcomes from each of your marketing tools and make better decisions about the best use of your marketing budget. Setting budgets for expenses allows you to identify problem areas before they are out of control and make changes in your business s internal processes to improve efficiency and profitability.
Developing solid sales forecasts and expense budgets require thorough planning. There are three basic methods for determining the sales forecast – Value Based, Resource Based, and Market Based – that tell you the minimum sales that will be acceptable (or your break even point), the maximum sales your business can produce with the resources available, and the amount of sales your market assessment deems you should be able to close. If your Market Based forecast does not fall between the minimum and maximum forecasts, you need to make some changes! All three of these forecasts should be performed during your startup planning and any time your business undergoes major changes.
Your initial expense budget should be as accurate as possible, meaning you should take the time to research your business needs and find the best resources for purchasing all furniture, fixtures & equipment, inventory, marketing, and services you will need before you start spending money. Once your business is up and running, schedule time once per quarter to review the actual expenses against your budget. Make adjustments as needed, but also set objectives for controlling or reducing expenses where possible, and always be on the lookout for better deals on supplies or services.
If you are planning for growth, forecasting and budgeting are even more important. The sales forecast calculations will help you identify which resources (employee, equipment, etc.) you will need to increase and when, and your expense budget will help you set cash aside to do so. Without financial planning, growing businesses often find themselves unprepared for growth. A sudden burst of business or opportunities to expand into new markets are either missed or handled through knee jerk reactions that cut into the profit potential. Taking the time to include financial management in your ongoing planning process will keep your venture poised to exploit opportunities as they come along.
Consistent periodic review of your financials is critical to the long term success of your business. As a business owner, it is to your benefit to learn and be comfortable with the numbers. No single part of financial management is all that difficult to master and understanding how each aspect of your business affects the others allows you to make the best decisions to improve profitability.
The three keys to success planning, marketing, and financial management are true for any type of business. Begin your business development with these principles in mind and arm yourself with all the tools you need to effectively plan, market, and manage the finances of your startup. Before you know it, your venture will be up, running and making money!
Author Resource:-
K. MacKillop, an entrepreneur with a J.D. from Duke, is co-founder of LaunchX LLC and authors a business startup blog. The LaunchX System, a five Unit series of step-by-step business startup procedures, key software and more answers the question, "Where do I start?" Visit http://www.LaunchX.com.
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