Running a business can feel like a balancing act. Some of the things you might need to do could include:
- Making decisions about where to invest your resources
- Balancing your short-term needs with your long-term goals
- Planning for both the expected and the unexpected
Keeping a close eye on how your business is tracking will help you to make better decisions, keep in control, direct your focus and appreciate how far you’ve come.
Here are some ideas to think about:
Forecast your cash flow
A cash flow forecast is an estimate of the amount of money you expect to make and spend over the next 12 months. It can help you make decisions that are sustainable for your business, because you’ll know what you can afford over time. Track your business finance against your cash flow forecast so you can adjust when you need to. You can use our financial plan template to help forecast your cash flow.
Understand your types of costs
Most businesses have both fixed costs and variable costs. Fixed costs are expenses that don’t change over the short term, for example, a retailer pays the same amount of rent whether they’re having a busy or slow day. Variable costs can be seasonal, changing with the amount of business produced, and might include labour and materials.
Keep an eye on your margins
Your profit margins are a comparison between your revenue and your costs. Your gross profit margin compares your revenue to your variable costs. Your net profit margin compares your revenue to all your fixed and variable costs. Higher margins tend to mean higher profits. This means your highest margin goods and services can point you to the growth areas in your business while lower margins can steer you away from lesser opportunities.
Track your adjusted cash balance
Your adjusted cash balance is the total amount of money your business has in the bank, allowing for any pending transactions. It will tell you if you can afford any immediate payments due or upcoming bills.
Learn your current ratio
Your current ratio is a measure of how solvent your business is. Solvency is the ability of your business to pay its debts. The higher your current ratio, the more able you are to pay your bills.
Work out your current ratio by dividing your current assets, such as unpaid invoices, by your current liabilities, for example, unpaid bills.
Know how much work you’ve got
Know when you can take on more, or when you need to work within current capacity. You can use your cash flow forecast to work out when your busy periods may be and look to your business plan to find out when you may have time for extra activities.
Next up: Paying yourself as a business owner