Tag: Business Finances
Financial Tips for Businesses #2
Goalsetting for Businesses
Businesses should be setting new goals on a regular basis, but at least annually. Goals should be set for the shorter, medium and longer terms. Business goals can include: to grow the client base, to make more profit, to repay outstanding loans or to expand the current products and services. Be specific and realistic when setting goals and attach timelines to every goal. Goalsetting has a direct impact on budgeting, forecasts, cash flow projections, tax planning and financial stability.
Savings Accounts for Businesses
Businesses should set-up a few savings accounts separate from the normal operational bank accounts. These savings accounts can be used to save money for tax payments, VAT payments, staff bonuses, buying new computer equipment, expanding to bigger offices etc. Separate savings accounts do not only offer higher interest rates than operational bank accounts but they can also be used to manage finances more effectively. Access to these accounts should however be tightly controlled and the accounts should be reconciled on a monthly basis.
Liquidity of Investments
Liquidity profiles of businesses’ investments should match their operational and financial goals in other words money should be accessible when needed. Don’t invest operational cash that you might need in the next few months in a six-month or longer fixed deposit. Putting away money to buy new equipment, to expand or to buy new offices in a few years can be invested in investments with longer-term liquidity profiles. The same rule applies for investments with a long-term view in mind. Proper planning will ensure you have access to your money when you need it and also avoid paying penalties when withdrawing money prior to the investments’ maturity date.
Businesses can create improved cash flows by paying their creditors as late as possible, but still within the agreed period. However the money due to creditors shouldn’t be used for operational needs in the meanwhile without having a definite plan and income source to replace it before it is due. It is always an option to negotiate preferential payment terms with your creditors when cash flow if tight. Avoid paying creditors late though; unnecessary penalties and interest might be charged and an unfavourable credit record will be the result.
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Written by Ronel Jooste
CA(SA), Financial Consultant and Coach, Blogger and Speaker
Contact Ronel: firstname.lastname@example.org
Financial Tips for Businesses #1
Personal versus Business Expenses
When having a business it is important to have a separate business bank account. Pay your business expenses from your business bank account and your personal expenses from your personal bank account. It may sound obvious but many business owners get it wrong. If you don’t keep your personal and business finances separate:
- You run the risk of your financial results not being a true and accurate reflection of your business.
- The accounting function can become a nightmare.
- SARS might penalize you for incorrectly deducting personal expenses for tax purposes.
- Your profit margins and other ratios will not be accurate and provide you with a false picture of your business.
- It might become a habit relying on your business to cover personal over-expenditure.
Analyse Combined Financial Results
Business owners wanting to make meaningful decisions, should analyse their combined financial status. Don’t analyse your income statement or balance sheet in isolation. To make optimal and powerful decisions based on your financial results, analyse all of these in relation to each other and as a combined picture: income statement, balance sheet, cash flow statement, statement of equity, budget and financial ratios.
Return on Investment (ROI)
Business owners should always calculate and know the Return on Investment (ROI) they make in their business. ROI is a solid performance measurement ratio assisting the business owner to understand how profitable the investment in the business is or how efficient any other investments are. ROI basically calculates the profit or loss generated on an investment in relation to the amount of money invested. The formula to calculate ROI = Net profit of the investment (total return less costs) divided by the total investment x 100. ROI is measured and expressed as a percentage and therefore it is easily comparable to other investments. The ratio will assist you to make the best decision if comparing different investments. It also assist you determining whether your current investment in your business is profitable.
Direct and Indirect Expenses
Certain products / businesses seem profitable but when the indirect costs are added to the costing model, the profit margin can become a lot smaller or the product / business might even make a loss. For example when selling hamburgers: the direct costs will be purchasing bread rolls, patties, tomatoes, lettuce, onions and cheese. But don’t forget to add the smaller indirect costs like sauces, packaging, printing price lists etc. Other costs like rent, salaries, water and electricity, marketing etc. should also be factored into account. Always consider all costs when making financial decisions; when determining prices; when doing cost projections and when calculating profitability.
Budget for Income and Expenses
When preparing a budget, it is critical to budget for both income and expenses. When budgeting for expenses only, you will not know whether you are projecting a profit or a loss. You will also not know if you are exceeding your budgeted income and should be cutting costs.