Small Business Finance

Small business finance is an often over-looked aspect in a home based business. Many see it as a necessary evil (like completing your tax return) that cannot be avoided although they prefer not to spend too much time thinking about it, leaving it up to accountants to handle.

I had a quick look at some small business and home based business websites on Google and it is amazing that most of them hardly even mention small business finance. Actually, it is not that surprising...

In many companies there is a clear lack of understanding between Finance and Sales & Marketing.
 

Several years ago I was Commercial Manager at a large earth-moving company. Although I officially reported to the Financial Director I spent most of my time with the Sales Director.

The Financial Director was always afraid that the Sales Director would do something stupid that would cost the company a lot of money.

The Sales Director once told me he had a dream that he was about to compete at an athletic event. As the starter's gun fired he leapt away but suddenly the Financial Director jumped in front of him, saying "Are you sure you are doing the right thing?" and "Do you know what you are doing?"...

 

Fact of the matter is that a company cannot survive without sales. By the same token, most small businesses do not fail because of a lack of sales but due to cash flow problems.

It is essential in any large company that the Sales Department and the Finance Department should make an effort to understand, help and support each other.

Problem is that a small home based business often only has one employee, namely the owner. This is especially the case in many new businesses.

The owner is responsible for everything from sales and marketing to finance. Very often small business finance is outsourced to an independent accountant in order for the owner to focus on sales and marketing.

There is nothing wrong to outsource accounting to a qualified company or individual. However, an accountant will normally only compile legally required financial documents and will not act as a financial advisor.

It remains up to the owner to interpret the financial records of the company and to take them into consideration when making business decisions. In order to do this he must at least have a basic understanding of small business finance.

As with most things in life, you do not have to be a rocket scientist to understand the accounting part of small business finance. It is actually very simple and logical. Basic small business finance accounting is all about Income and Expenses, Assets and Liabilities and Cash Flow.

The problem with traditional accounting and financial statements is that it only gives us a snapshot of the past. Furthermore, the figures are meaningless unless we can interpret them and know what to look for.

You should be able to interpret financial statements, in order to:

1. Determine if the company is doing as well as expected

We need to measure performance. Having goals and objectives mean nothing unless we can determine whether we are on track to achieve the results we forecasted when we started the business.

2. Identify and fix any problem areas

Are we able to pay our creditors? Is it taking too long before we receive payment from debtors? Are we spending too much on entertainment? We often get so involved in running our business that we don't even know what we are spending on the business until we take a good hard look at the cold figures.

3. Plan, budget and forecast

Use actual figures as a basis or starting point for future planning.

Small business finance is too important to leave to other people. Let the bean counters crunch the numbers and compile the financial statements but take an active interest in the figures.

Most of us work for money or should I say very few of us can afford to work for free. Money is obviously important to us. Why then do so many of us spend 99% of our energy making money and only 1% or our energy managing our own money.

So many people are excellent businessmen or businesswomen. They fight for every deal and take nothing for granted. However, when it comes to money they don't hesitate to leave it up to other people to manage, often not even knowing how much money they have in the bank. Does not make sense.

Take an active interest in small business finance. Learn to understand the basic concepts. Ask your accountant as many questions as you wish. Understand where your money is coming from and where it is going to. Solve any problem areas without delay. Look after your money and it will look after you.