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Business Finance: The Basics

When you run your own business, it’s not enough to be the best there is at what you do. You also need to be able to manage your business finances effectively. Many business owners have proven adept at engaging customers, making a great impression and inspiring loyalty. Yet their companies have fallen on hard times because of poor cash flow, overspending or underinvestment in infrastructure. 

Learning to manage your business finances can be a baptism of fire. With so many metrics to watch, and so many areas of business spending demanding their attention, many businesses have had to learn to manage their finances the hard way – through trial and error. However, we have some tips to help you get to grips with the basics of business finance. So you can build your company’s finances on the strongest possible foundation.

Cash flow is the key

If there’s one guiding principle that should influence every financial decision you make, it’s that cash flow is the key to harmonious finances. Ensuring that your business has sufficient liquidity at all times is absolutely essential. Maintaining good cash flow ensures that your debts get paid, preventing unnecessary charges and interest payments that could impinge on your profits. It ensures that you are able to pay your team on time, thereby keeping them happy and motivated. It allows to you to pay your vendors on time, too, ensuring your relationship with them remains on good terms. 

When cash flow is stymied by unplanned or ill-considered spending, it can precipitate a downward spiral in your business finances.

Know which metrics are the ones to watch

As occupied as you may be with the day-to-day operations of your business, it’s essential to keep an eye on your finances through regular reporting. New startups, especially, need to be consistent in carrying out the following reports every month:

  • Profit and loss statement (P&L)

  • Balance sheet

  • Cash flow statement

These provide a holistic view of your business finances and can help you to identify areas of unnecessary or wasteful spending, as well as areas where you can afford to spend more as they are likely to result in substantial returns. 

Crucially, regular reporting will prevent you from making common financial errors, like watching the wrong metrics. revenue, for instance, can be a deceptively reassuring metric. Just because your business has a lot of money coming in does not necessarily mean that it’s in good financial health. Your overheads, debt repayments and sundry expenses can  all add up and quickly consume your revenue. 

This is why your profit margin is arguably the most important metric to watch, and the most reliable indicator of your company’s financial wellbeing. 

When you need to borrow, borrow smart!

Remember that debt is not a dirty word. While financial prudence and caution are commendable, they can also result in opportunity loss that creates more trouble for your business than it solves.  

Capital investments in things like new equipment, better software or more conveniently located premises can all help you to improve business revenue and profitability. It’s just a case of being smart about when, where and how much you borrow. Take time to research rates of interest from different lenders, and be wary of borrowing more than you need. More debt means more interest, which will only impinge on future profits. 

Make it as easy as possible to get paid

While it’s not the be all and end all of your business finances, revenue is the raw material from which profits are made. This means you need to eliminate barriers to sales in order to maximise revenues – the more revenue you have coming in, the better. By making it as quick, easy and secure as possible to get paid, you can build trust in your brand while potentially boosting your revenue. 

And that’s where we come in! 

We can help

If you’re interested in finding out more about any aspect of your business finances, get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.

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