Practical Financial Management for Entrepreneurs

An Instant Guide

Guy Rigby

• Publisher: Harriman House
• Year: 2011
• eBook ISBN: 9780857191793
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

This eBook is about practical financial management for entrepreneurs.The author of this instant guide from Harriman House, Guy Rigby, has also written From Vision to Exit, which is a complete entrepreneurs' guide to setting up, running and passing on or selling a business.

Practical Financial Management for Entrepreneurs

“Cash flow is everything.”

— Simon Woodroffe, Yo! Sushi

Keeping the financial score

Businesses don’t go bust because of a lack of profitability. They go bust because they run out cash!

Sadly, many entrepreneurial businesses fail in their start-up and development phases and even mature businesses succumb from time to time. There are many reasons for this. Some businesses simply have poor strategies. Some are overtaken by the advance of technology. Others have poor management, often particularly evident in the financial area where entrepreneurial businesses can be prone to minimising or cutting ‘back office’ costs to the bone. Beware! This kind of penny pinching can often be fatal.

So while entrepreneurs are often 100% focused on achieving their wider goals, someone needs to be responsible for keeping the financial score.

It’s worth remembering that it’s not just bad businesses that run out of cash. As we have already identified, many early stage entrepreneurial businesses are consumers of cash. And, perhaps counter intuitively, cash flow difficulties can just as easily arise from rising as opposed to falling sales. Believe it or not, falling sales can often drive more cash into a business.

So cash is king! This may be a cliché but only because it’s true. In order to build sustainable businesses, entrepreneurs must live by this mantra. They must effectively manage their cash in order to build firm foundations and keep their organisations in good financial shape.

In order to do this effectively, it’s not just the management of the incoming and outgoing cash that needs close attention. It’s also the management and control of a raft of other financial data. Effective financial management should not just help a business to survive. It should help it to grow and prosper.

“Fundamentally, a business must be able to understand and monitor its financial dynamics,” says Giles Murphy, head of assurance and business services at financial services group Smith & Williamson. “This requires up-to-date, relevant and accurate management information which can be compared against budgets and comparatives from previous years.”

In this chapter, we’ll consider the basics of practical financial management, how you can keep control, what you need to monitor on a regular basis and how you can keep your bank manager on side. We’ll also look at some regularly used financial ratios and phrases.

While the generation and preservation of cash will always be the number one priority for all businesses, they also need to consider how to invest in the future. The entrepreneurial business therefore needs to establish a balance between investing in growth, managing costs and, for most established businesses, maintaining and improving profitability.

In order to achieve this in your business, you will need a clear understanding of your current and future finances, including:

• the basics – recording and tracking your results
• budgeting and forecasting
• management information and key performance indicators
• key financial ratios and phrases
• protecting your assets
• focusing on profit
• collecting your debts
• keeping the bank on side
• investing in the future.

So let’s examine each of these…

The basics — recording and tracking your results

A business that doesn’t understand its financial position is flying blind. To many, this may seem irresponsible, but it’s amazing how often it occurs. Such a business generally has no basis on which to make decisions, no ability to commit future investment and no understanding of what activity or issue will eventually cause it to fail, apart from the inevitable absence of cash.

Sometimes this unhappy state of affairs results from an accounting breakdown, a people or systems failure of such magnitude that basic accounting information is either unavailable or completely unreliable. Sometimes it arises as a result of fraud and the deliberate manipulation of financial information. And sometimes, perhaps most frequently, it arises because of a lack of understanding of the critical importance of the finance function, resulting in under-resourcing or the employment of unqualified staff, or both.

If you feel threatened by any of these, or don’t know enough about your finance function to know whether you feel threatened, it’s time to take a look. Here are some of the basics:

Bookkeeping

Every business should keep what are often referred to as ‘proper books of account’. Before computers, these were real books that were used to record your cash inflows and outflows, your fixed assets such as plant and equipment, your sales and customer balances (debtors), your purchases and supplier balances (creditors) and, if appropriate, your stock or work in progress. These would enable the regular preparation of management accounts, probably drawn up monthly and typically consisting of a profit and loss account, a balance sheet and a cash flow statement.

These days, technology has simplified the process, enabling the creation of electronic books and records. This has many advantages as well as the odd disadvantage.

I remember the day that I interviewed a lady for an accounts role, asking her to prepare a profit and loss account and balance sheet from a pre-prepared, simple set of transactions. For an experienced operator, this would have taken 15–20 minutes. So after an hour had gone by I thought I would look in on the interviewee. To my consternation, she looked rather puzzled and was staring at the untouched paperwork in a somewhat terrified way. When I asked her whether she had a problem, she said that the profit and loss accounts and balance sheets she prepared in her existing job were the result of keying F6 on her computer!

The moral of the story is clear. Beware of using or relying on unqualified accounts staff who do not understand the figures they are trying to prepare.

The profit and loss account

The profit and loss account does exactly what it says on the tin. It shows all of your revenue, be it from sales, commissions, fees, royalties, rents or interest and sets it against all of the costs and expenses incurred in generating that revenue, giving you a balance which is your profit or loss for the period.

In general, profitable businesses generate cash over time and loss-making businesses consume cash. Ultimately, businesses need to make profits, as opposed to losses, in order to survive.

The balance sheet

The balance sheet gives you a picture of your financial position on a given date of your choosing. Typically this will be at a month or year end, showing your assets and liabilities and the balance between them. In broad terms, if your assets exceed your liabilities, you have some net worth (or net assets) in the business. If your liabilities exceed your assets, you have net liabilities, a situation where you owe more to your creditors than the total of your assets. This can indicate insolvency, so it’s important to be aware.

Assets

Assets are generally split into two main categories, as follows:

Fixed assets

These are capital assets that are used b...

Table of contents

• Cover
• Publishing details
• Praise for From Vision to Exit
• About the Author
• Preface
• Practical Financial Management for Entrepreneurs
• From Vision to Exit
• Other Business eBooks From Harriman House