Managing your business financesOne of the key tasks as a new business owner is making sure that you manage your finances well. Often, a start up is run on a minimal budget, and as such effective cash flow management is key. You don’t need to be an accountant to manage your cash position, but you do need to be aware of some key statistics within your business to ensure that a downward trend doesn’t leave you with more month than money!
There is an often repeated phrase in business, which you might have heard before:
Turnover is Vanity
Profit is Sanity
but Cash is King
This saying highlights a key area that some new business owners forget: ultimately, your staff, suppliers and landlord will need paying, and cash is vital for the health of a business.
One of the first areas that business owners get confused on when it comes to financial matters is the difference between cashflow and profit. Did you know that a business could have £150,000 profit on paper, but be overdrawn with their bank and struggle with cash flow? Once you have an understanding of the differences, it is obvious, however many entrepreneurs don’t immediately understand this area.
There are a number of items that may be included within a profit and loss account that may not be directly reflected in your bank account. If you make a trade sale to another business, it would often have payment terms attached, and as such you might have to wait 30 days to get paid. Similarly, you would have payment terms on your purchases once you are an established business, and again your bank account wouldn’t reflect these expenses until the payment is made.