A recent article on the Huffington Post contained some great, overall advice for small business owners. Many small business owners (even here in the San Francisco Bay Area and Silicon Valley) don’t have a good grasp of the financial fundamentals of their companies.
“When a small business owner doesn’t understand the importance of the math behind the business, the business is less likely to succeed. That doesn’t mean that the small business owner has to have advanced mathematics skills, but he or she does need to understand fundamental concepts of business planning, budgeting, cash flow, sales projections and pricing strategies.”
Here are some of the key points from the article:
1. “A Solid Business Plan Is Your Foundation”
Business plan are important even if you’re not applying for a business loan or trying to raise capital. A business plan should have your mission, specific goals, expenses, a marketing plan, and cash flow projections.
2. “A Budget Provides a Strong Framework”
A budget is crucial and should be comprehensive even with unanticipated expenses
3. “Understanding Cash Flow Can Prevent Funding Headaches”
“Cash is king” as the saying goes. Not only do you need to monitor your current cash balance, but you also need to proactively monitor your future cash flow.
4. “Your Balance Sheet Is Your Friend”
While most small business owners intuitively understand a Profit & Loss Statement (P&L Statement), very few small business owners understand the nuances of a balance sheet: e.g., Accounts receivable, accounts payable, working capital, fixed assets, other assets, liabilities, etc.
5. “There’s Art and Science to Setting Prices”
“Your pricing formulas will have to be revisited and adjusted periodically. The correct pricing of your products and services is critical. Unfortunately, many business owners don’t devote enough attention to sound pricing practices. You have to understand all of your underlying costs in order to determine a profitable price. Your understanding of your hard and soft costs is key to calculate your gross margins. You also need to account for how long, on average, invoices spend in accounts receivable. This knowledge will help you price your products and services so they’re both competitive and earning a profit.”