As a small business owner, a deep understanding of your company's financial situation drastically improves your chance of long-term success. When you know exactly where you stand in terms of your financials, you can plan for the future and avoid common financial management pitfalls.
Unfortunately, the fact remains, entrepreneurs struggle to get a grasp on their finances. In a recent Intuit study, 46 per cent of Canada's owners rated their knowledge of financial management as sufficient or less, while one in 10 surveyed believe that a lack of financial management knowledge is the greatest barrier to small business success in Canada.
Here are 10 tips for taking control of business finances, improving financial literacy and taking your company to the next level:
1. Do the math. Do you know how much money it takes to run your business? Determine the true costs of your products and services, including labour, transportation, rent, marketing, insurance, phone, Internet, utilities, taxes, and whatever else you require to function. That's just the beginning. You need to learn how to effectively track money in and out of your business, a first step of which would be setting invoicing periods.
2. Uncover your hidden costs. Have you ever needed to obtain a permit? Or get a license? The expense of these things can start adding up, especially when you factor in the cost of legal services, your own salary, return on investor capital, and capital for future expansion. Don't forget to add the cost of borrowing money and the interest and debt you may have already accrued. Then start thinking ahead: once you can put numbers to everything that takes money out of your business, you can plan how much you will need to grow going forward.
3. Bone-up on the basics (at the very least). Even if you have a professional helping you with your finances, you still need to understand them. Know how to read – and make use of – income statements and balance sheets, understand your inventories, and learn how to manage your cash flow and supply chain.
4. Know where you stand. Educate yourself on your marketplace. Analyze your competitors and ascertain how your company stacks up against them in terms of goods, services, and pricing. Determine competitors' strengths and weaknesses and identify opportunities therein. Additionally, work on deepening your understanding of your customers and figure out if they could and would spend more for what you provide. All you have to do is ask. Crowd source via Facebook and Twitter – market research has never been easier.
5. Establish priorities. Making a profit is an obvious goal, but what else should you aim to accomplish? Do you want to see your product on every shelf or only in select boutique stores? Do you want to expand or franchise your services or keep your company small in order to provide customized experiences to those willing to pay for them? Identifying your priorities will help determine the future course of your business, and the correct costs for your products or services.
6. Embrace technology. Intuit's most recent study on small business success found a sizeable majority (86 per cent) of Canadian entrepreneurs believe the contributing value technology adds to their business is worth the cost. By using mobile devices and tools like financial management software, online banking, and secure cloud-based document storage, entrepreneurs can work effectively from anywhere, making life as a business owner easier, faster, and more enjoyable.
7. Find a professional you trust. Everyone needs a second opinion. Even if you can only afford a professional's expertise on a part-time basis, accountants and bookkeepers are invaluable partners who can help you understand where your business is and where it is headed. They will use the data from your financial management tools, analyze it, and work with you to provide an overview of your needs.
8. Learn how to use financial management software. Whether you have a good understanding of finance or are just starting to learn, there are software options that can help you accurately track your finances, invoice customers, file taxes, manage your budget and build your financial literacy at the same time. Cloud-based financial management tools can give you an immediate picture of your financial situation, saving you time and allowing you to get back to what you love: growing your business.
9. Seek guidance from credible organizations. Canada has a vibrant small business community, with small businesses making up about 98 per cent of employer businesses, according to Statistics Canada. This means that we also have near-countless resources available to entrepreneurs, including associations, classes, and professional groups. There are several organizations willing and able to guide you, including Startup Canada, Communitech, and Futurpreneur. Taking advantage of these resources will help you make smart decisions, get you on the right track and keep you there.
10. Determine your worth. How do you price your products or services and how much does an hour of your time cost? These questions confuse most entrepreneurs. Unfortunately, many business owners guess incorrectly and assign arbitrary numbers. In fact, one in four small business owners (27 per cent) believe they may be undercharging based on the high level of value they provide and are therefore impacting their overall profitability and chances for long-term success.
Worth isn't just about price or what to charge – it's about the true value of your business, which involves a combination of factors: your products, services, competitive landscape, and the value your business brings to customers. By educating yourself on your financials, and working with the correct tools and credible professionals, you'll be on your way to a lifetime of success – without leaving anything to chance.