Finance can be a complex and often daunting aspect of running a business. Many entrepreneurs find themselves constantly hovering near their overdraft limits, unsure of where their money is going. To help business finance, here are ten essential figures you need to work out for your business.
1. Overheads
Overheads are the fixed costs required to operate your business. These are expenses you incur even if you don’t make any sales, such as rent, utilities, and salaries. Keeping your fixed costs low is crucial for financial stability.
2. Variable Costs
Variable costs are directly proportional to your production levels. These include costs like raw materials and direct labour. Unlike overheads, these costs only occur when you produce something, making them easier to manage as your sales increase.
3. Profit
Profit is the value of your sales minus the associated variable costs and a proportion of your overhead costs. It's crucial to include all fixed costs in your calculations to avoid underestimating expenses and losing money.
4. Debtor Days
Debtor days represent the average time customers take to pay their invoices. As your business grows, keeping this figure low becomes vital to maintaining healthy cash flow.
5. Factoring
Factoring is a financing method where you sell your invoices to a factor (or factoring company) at a discount in exchange for immediate cash. This can provide up to 80% of the invoice value upfront but comes with fees and interest.
6. Creditor Days
Creditor days indicate the average time you take to pay your suppliers. Managing this effectively involves paying critical suppliers first while maintaining good relationships.
7. Credit Rating
Your credit rating reflects your business’s creditworthiness. Paying bills late or having County Court Judgments (CCJs) can harm your rating, making it difficult to secure credit. Monitoring and improving your credit rating is essential for financial health.
8. Quick Ratio
The quick ratio is a crucial accounting metric that measures your ability to pay short-term obligations. It is calculated as (Debtors + Cash) / Creditors. A ratio above 1 indicates solvency, while a ratio below 1 suggests financial trouble.
9. Cash Flow
Cash flow management involves tracking your income and outgoings to ensure you can meet financial obligations. Using a spreadsheet to forecast cash flow helps in planning for periods of high expenditure.
10. Balance Sheet and Profit & Loss
These financial statements provide a snapshot of your business's financial health. Regularly reviewing your year-to-date figures alongside monthly performance helps in making informed decisions.
Why Use a Bookkeeper?
Managing all these figures can be overwhelming. Accounting software simplifies the process, but hiring a bookkeeper can provide several additional benefits:
Accuracy: A bookkeeper ensures your figures are accurate.
Efficiency: They handle invoicing promptly, avoiding delays.
Time-saving: Outsourcing bookkeeping saves you time and hassle.
Cost-effective: Accountants charge less if a bookkeeper has managed the basics.
Debt Management: They can also help chase overdue payments.
Wondering where to find one? Well here at SME Centre of Excellence we offer accountancy packages to suit all your business needs as an affordable price. Click here to view our packages.
Kathrine's Success Story
Kathrine, planning to start a family, needed a job that allowed her to work from home. Networking led her to businesses needing help with their accounts. With advice from her local Enterprise Agency and personal engagement with clients, she built a successful bookkeeping business. She now balances her work with family life, planning to expand her client base and team as her son grows.
Understanding and managing these finance figures can significantly improve your business’s financial health, paving the way for sustained growth and success.
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