Not every entrepreneur has to be a Chartered Accountant. But every entrepreneur must understand finance such that they can drive business growth, understand taxes and manage the financial health of their business.
A stronghold on finance for non-finance leads to the following advantages for the business:
- A strong understanding of assets and liabilities
- Strategic decision making based on data from P&L, Balance sheet and Cash flow statement
- It makes your business ready for fund raising
- Business becomes prepared to manage costs
- The business is prepared to manage working capital
These Finance for Non-Finance tips can impact your financial decisions and can also affect the performance of your organization in terms of profitability. You will gain a basic understanding of Finance for Non-Finance concepts to drive your organizational growth.
Here are some important tips related to Finance for Non-Finance to understand your financial health:-
1. Know your Balance sheet/Report Card to understand your business
- A balance sheet is a report card or a scoreboard that shows you the financial health of your business.
- A balance sheet shows you the bigger picture of your company. It goes beyond the short-term view to gauge your business progress over the time.
- A balance sheet helps you calculate the value of your company. You may not be thinking about selling your business anytime soon but having an idea of the value can give you an insight about your future plans.
- A Balance sheet also works as an early warning system. Is your equity shrinking or growing? If your business is not producing growth equity, looking at the assets and liabilities on your balance sheet can help you find out why. For example, if your inventory is a part of your assets, it can turn out to be dangerous because if the inventory doesn’t sell quickly it can become your liability.
- A balance sheet is a very important financial tool because it gives you an insight on the availability of funds to run your business in the short-term and also allows you to make predictions based on your current financial status.
2. Build a strong Cash Flow management
- 7 out of 10 start-ups fail because of poor cash flow management. Running out of money is the most critical situation where most of the start-ups fail. You always need to know where the money is coming from and where the money is going.
- Perform a cash flow analysis at least once a month. This will help you identify the risky situation and will help you move forward. It also records all the relevant activities for the current period.
- Cash Flow management is the amount of cash collected and used by a company in a set period and checking on how much cash is available to perform other functions. This is one of the most difficult and critical aspects of financially understanding your business.
- You are going to put your business in a very dangerous position if you don’t stay on top of your cash flow. It doesn’t matter how good your idea is when you run out of the money you always hit a brick wall.
3. Limit your fixed expenses in the beginning
- In the starting stages of a business, keeping all your expenses low is an important key to longevity.
- Utilize your major capital to grow your business, this will enable you to fight when the going gets tough in your business.
- Many business owners focus only on the wrong things; like offering too many perks, fancy offices and forget that generating revenue should be their top priority initially.
4. Calculate your business costs and margins
- The cost to produce a good or deliver a service is constantly shifting. Changing economic conditions can also affect the willingness of your customers to pay the price.
- Keeping a close eye on costs and adjusting prices to ensure strong profit margins as this is one common mistake entrepreneurs make.
- A lot of times business owners fail because they acted too late to make necessary adjustments to the pricing structures.
5. Capitalization of the business
- Having funds in hand to pay employees or cover operating expenditures can help you keep the business afloat. That’s why business owners need to ensure that they either retain enough earnings to secure sufficient loans and to manage through challenging times.
- When it comes to understanding taxation, remember that both businesses and their owners are subject to varying levels of taxes, so a clear understanding of the distinction between personal and professional taxes need to be understood.
The health of your business completely depends on how much understanding you have of the Finance for Non-Finance aspect. Above are some points on finance for non-finance you must know if you want to enter the world of entrepreneurship and run a business.