Top 5 Reasons For Understanding Your Businesses Finances Better

Introduction 

As a small and medium business owner, you know that it can be hard to keep track of all the moving parts in your company. But as your business grows, so does the need to understand its finances. Understanding your finances can help you determine the health of your business, make better decisions about what kind of work or products you should be prioritising and even tell you when it's time to seek outside help with managing your cash flow or budgeting needs. So if this sounds like something you want to learn more about, we're here for you! Here are 5 reasons why every small and medium business owner should care about their company's financials: 

1. Understanding the health of your business

Understanding your finances helps you understand where you are in the business cycle. Is your business growing, are you making money, or are you losing money? Understanding this information is critical to being able to make decisions that will help you succeed.

You can use the financial statements provided by your accounting software program to gain a better understanding of where your business is at and what needs improvement. If sales are declining and costs are increasing, then it's time to take action now and not later when it's too late!

2. Understanding what products are making or losing you money

You can use information from your accounting software to determine what products or services are the most profitable and therefore should be given priority. If a particular product is making much more money than other products, you may consider increasing production of that product, or even selling the product at a higher price point.

On the other hand, if one product is costing you more money than others, then perhaps it's time to reconsider your strategy with that particular product. Do you need to produce less of it? Or perhaps find another way to deliver it (e.g. through outsourcing)? 

3. Understanding your cash flow & how to manage it

Cash flow is the movement of cash into and out of your business. It's the lifeblood of your business, so if you're not managing it properly, you may run into some problems.

Cash flow is essentially the difference between profit and loss for a company; it means that if one day you have more money coming in than another, then that particular day has positive cash flow. If there's less money coming in than usual, then there will be negative cash flow...and that can be very dangerous for any business!

It's important to understand how much revenue each month brings in because this tells us whether we'll be able to pay our bills or not when they come due later on down the road (and trust me: they always do).

4. Understanding budgeting and profit & loss statements

While you may not have time to sit down and go through all of the data in your P&L report, it's important to understand what's happening with your business. If you're making money, that's great! If you're losing money, there are likely some areas where you can cut costs or increase efficiency to turn things around.

In addition to knowing how much revenue is coming in and how much is going out (expenses), understanding budgeting and P&L statements will help you determine whether new strategies are working or if they need tweaking. 

5. Understanding when you need to seek help with your finances

So how do you know if it's time to seek outside help? Well, there are some red flags that might indicate there's something wrong with your finances. For example, if your business has been growing in recent years but you still struggle to pay off debts or save money, then something is clearly going wrong somewhere. Another red flag might be if your cash flow has dried up and there doesn't seem to be any way for it to start flowing again.

Conclusion

In conclusion, we would like to say that understanding your businesses finances can help you make the right decisions when it comes to increasing profits, managing cash flow and being able to forecast future costs. However, if you feel that your business is struggling financially then it's always best to seek help from an expert who can review your situation and give advice on how best to proceed next. Though if you want to know more about your businesses finances yourself, then the 2-day Knowing Your Numbers workshop from The Icehouse might be right for you!

For information on programmes, workshops and business coaching services from The Icehouse, click here.

For more business ownership and leadership advice, check out more of our resources.

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