As entrepreneurs and small business owners, we all want to grow and succeed. While success means different things to each of us – achieving a healthy work-life balance, doing what we love each day and working with inspiring, talented people are all common things our clients aim for, and it’s what inspired them to go out on their own.
However, all of this is inevitably tied to the numbers. If your business is in good financial health, you can expect to enjoy all of those things I listed above, and then some.
So here are four telltale signs that your business is (or gulp, might not be) in a good place financially.
You understand your balance sheet, and recognise its importance
Profits look great on paper as does cash in the business bank account, but they don’t always tell the whole story!
Essentially it’s your balance sheet that is the holy grail, as it provides a snapshot of your business at any given point in time, and includes information about not only your income and expenses, but also your assets and liabilities.
In short your balance sheet will show assets owned by the business such as debtors (money owed to you), cash (money in the bank), and any fixed assets (heavy stuff such as machinery and equipment), liabilities owed by the business such as taxes, and loans, and finally equity, which is the cash you or another owner has invested in or taken out of the business.
Importantly, liabilities and equity will always equal your assets, so your goal should be for your assets to be greater than your liabilities. To safeguard yourself, always be sure that there is enough liquidity in your assets, which essentially means you can use your assets as cash to pay your employees, suppliers, and cover the cost of all other liabilities.
You’re able to pay your creditors on time
It’s a little cliche, but cash really is king. If you’ve got cash readily available to pay employees, suppliers and other debtors without your bank going into overdraft, you’re in good standing.
On the flip side, the business might appear as thought it’s making a profit, but if you’re not able to make these important payments, this could be a sign that you’ve invested too much into the business – whether that’s by hiring too many employees, purchasing too much inventory that you can’t move at a fast enough rate, or credit customers (debtors) aren’t paying quick enough for you to meet your liabilities.
If this is the case, it’s definitely time to look at your balance sheet and P&L, and consider what needs to be done to get back on track. A bookkeeper can also offer some added value and strategic advice here.
You get the importance of debtor days
Now this is tied to the above point – if you’ve drafted contracts up for your clients and customers, they have clear payment terms, and have been signed by both parties, then chances are you’re more likely to be paid on time.
It’s important to make this a priority in order to safeguard your business, as well as include clauses around late fees and what happens if someone fails to pay you. Discounts for early payments are a great way to ensure you have enough cash in the business at all times too.
If you’re not being paid by your debtors on time, it will inevitably have a flow on effect and impact your ability to pay others. So, look to a legal expert to get those contracts drafted up as soon as possible – the investment will pay off in the long run.
You price to make a profit
If you’re charging the right fees, you’ll be able to purchase things like more materials for products, move to bigger premises, and bring on more staff so that you continue to grow, rather than try to wear all of the hats and become completely overwhelmed (and the whole work-life balance dream goes out door).
Now it can be easy to keep your prices lower than they should be when first starting out, because you need to pay the bills and gain trust in your new business or brand. However, it can be very difficult to increase your prices once they’ve been set. So, be sure to develop an accurate pricing strategy from the very beginning.
Those who see the value in what you provide, whether it’s your services or products, will be comfortable paying for them, and are probably your ideal customers and clients! And those opportunities you may miss out on? Chances are you’re not the right fit for one another anyway, and this is a blessing.
It’s important to note here too that for service-based businesses, your P&L might show you that you’re making a profit or earning more than when you were working full-time, but you may be putting many more hours in. Don’t forget to account for this when deciding on your fees, and look to project management tools to help manage your time.
So what’s the key to good financial health?
It’s all about understanding what your reports are telling you, and viewing and monitoring them together, rather than in isolation. Then, consider what needs to be done to maintain your positive financial health, or to get out of the red.
Luckily for you, we love reporting on the numbers and extracting and sharing the small business stories that they tell.
Book a free consultation with me today, and we can discuss your financial and reporting needs in more detail!