Specific reasons why small businesses fail are as unique as the businesses themselves, but there are some commonalities that explain many small business failures. In some cases, it’s easy to see the problem: there isn’t enough demand for what the business produces at a price that will generate a profit. In other cases, problems aren’t as easy to identify. In all cases, however, the numbers must add up for your business to thrive.
One important reason many small businesses don’t last is that the business owner doesn’t understand the importance of the numbers behind the business. Not that you have to have an advanced degree in mathematics, but you do have to be willing to examine the numbers honestly and understand the stories they tell. Here are some fundamentals of “doing the math” that are essential to your success.
You Need a Satisfactory Business Plan
Without a solid business plan, you won’t be able to get a business loan, but even if you’re bankrolling your business yourself you need a plan. It should include clear goals, expense estimates based on reality, a plan of action, and a cash flow analysis you can turn to when making decisions early in the life of your business. A sound business plan can also help you resist wasteful spending habits.
You Need a Budget
Just as you need a budget to effectively manage household expenses, you also need a budget to serve as your financial guide as you get your new business off the ground. With a budget, you will have an easier time maintaining the direction of your business, even if you end up having to revise it frequently. Budgets need to be comprehensive and, as expenses you didn’t think of arise, they need to be worked into future budgetary iterations.
Cash Flow Projections Are Essential
In addition to your current cash balance, you have to do your best to manage cash flow. That means understanding your particular business’s cash-to-cash cycle and ultimately looking for ways to improve it. When cash flowing in exceeds cash flowing out, your business is operating profitably. Otherwise, it’s time to reexamine income and expenses.
Timely, Accurate Financial Statements Matter
Business transactions move at a faster pace than ever given advances in technology, so you have to be ready to make decisions quickly. Decisions should be made based on the most current and accurate financial data you have. With an up-to-date balance sheet, which summarizes your business’s assets and liabilities, you can make smarter decisions and avoid getting into difficult financial situations.
Pricing Formulas Must Be Revisited Periodically
The importance of pricing products or services correctly cannot be overemphasized. Yet, many business owners don’t devote sufficient time and attention to their pricing formulas. Do you know underlying costs so you can derive a price that’s profitable? Knowing gross margins, understanding expenses, and knowing average days that invoices remain as receivables can inform better pricing.
The owner’s willingness to deal with the numbers is essential for the success of even the smallest business. You don’t do this only to quantify your level of success, but to discover problems early, identify and address underlying issues, and to understand where you are in relation to your goals.
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