As a business owner, you aren’t expected to know everything. The fact your business has done so well is probably because you simply knew how to delegate and where to go for help. However, when it comes to finances, successful business owners still feel like they should know all the answers. After all, how could you possibly be a ‘real’ entrepreneur if you don’t know what working capital means or how much your largest customers make you in profit?
The reality is, you’re successful because you use your time effectively and focus it where you have the most impact, whether that’s managing people or creating new products and ideas. But for those finance questions you feel you really should know, here are the answers and some prompts for what numbers you might want to dig out.
What does working capital mean?
This is an important area to understand as without this knowledge, you could make poor spending decisions or not leave yourself with enough to pay off your debts. Working capital is the amount you get after deducting current liabilities from current assets. It tells you how much cash is tied up in the business through holding stock and through your trade debtors (people who owe you money) as well as how much cash you need to pay off the business’s short-term obligations.
What is a cash flow statement?
The cash flow statement is a financial statement that summarises the movement of cash (and cash equivalents) that come in and go out of a company. It’s useful to understand so that you can measure the strength, profitability, and long-term outlook of your company
How much profit do you make on your five largest customers?
While you should try and understand your profits with all customers, the profits you make with your largest customers determines your profitability as a business. Consider how often they buy, how large their orders are and how quickly they pay. Understanding this can help you take action and increase profitability where you can, whether it’s through quantity, frequency or simply better communication. It might even be you have to ‘fire’ some of your clients to give you capacity to take on more who are a better fit.
When does your cash reach its highest and lowest points of the year?
Many finance directors track cash flow by following net income and the bank balance. However, neither of these are very useful in predicting future cash needs. Capital asset purchases, growth in inventory, debt service and capacity expansion can all affect your future cash balance. With a little work, they are easy to predict meaning you can plan for the future more effectively.
Do you roughly know what tax you will owe?
Whether you are a limited company or a sole trader, you owe tax. As a limited company, you will owe corporation tax and as a sole trader, you will owe income and national insurance. You should try to understand what your allowable expenses are so that you have all the right information to hand when it comes to sending your ‘books’ to your accountant. It will also help you understand the right questions to ask your accountant when it comes to trying to reduce your potential tax bill.
What does it cost to acquire a new customer?
Businesses don’t often have a firm grasp on the costs of acquiring a new customer. Your sales team might have to spend a lot of time to bring in every new client and that’s costly whereas increasing sales to your existing base could yield far better results. If new customers are what you continually need because of the nature of your business, then do you quantify your leads? If you exhibit or advertise, do you know how much new business came in as a result, and whether the costs were worth it? Understanding these numbers can help you build a healthier and more cost-efficient pipeline using other types of marketing whether it’s print or digital.
What are your product or service margins?
A business that doesn’t understand its unit costs cannot know its true margins per product. Business owners usually know their raw material costs but don’t know their true profitability by product, so brushing up on these numbers will help you recognise if you need to find a new supplier and save money down the line!
While you are not expected to understand all the numbers relating to your business, the above are some you should be aware of or at least know where to go for the answer.