FINANCE BASICS FOR YOUR START-UP
It is reliably estimated that 50% of all small businesses in South Africa fail within the first 24 months of operation. Research by UWC has revealed that this statistic goes as high as 70-80% within the first 5 years. The reasons for business failure range from lack of planning, being a one-man show and failing to maintain accounting records.
Most small businesses fail due to cashflow pressure. Even the most profitable small business will fail if cashflow is not regularly flowing into the business to cover working capital and other operational needs. As the small business owner, it means that you need to have your finger on the cash pulse – you need to understand where your Rands are coming from and where they are going to. With this information, you then need to make informed decisions to support and grow your business bottom line.
At MMS Cloud Accounting, we would like small business owners to be more aware of the key financial disciplines that will assist you in managing cashflow:
- Bank Reconciliations The process of performing a bank reconciliation ensures that all transactions appearing on your business bank statement, are reflected in your accounting records. By performing this reconciliation on the minimum basis of weekly, you are assured of having an accurate and timely view of your cash position. You will have a better understanding of your business’ ability to pay suppliers, staff and by ensuring your bank reconciliation is up to date, you will have more reliable profitability data on the business.
- Budgeting The process of formulating financial goals is vitally important in ensuring that your business is geared to serving them. Regularly compare your actual trading results to your budgeted/planned results to identify weaknesses in your business, areas where expenses need to be cut back, etc. Where your actual performance is continually failing to meet budget, recognize that your objectives may be too ambitious or that you need to make important changes in the business, in order to realize your budgeted outcomes.
- Profit or Loss Also known as the “Income Statement”, this report reflects the net trading result and the net position is either a profit or a loss (or in rare cases, breakeven). The report will summarize your total incomes against all expenses and should be compiled at least monthly to give you a good sense of how your business is performing. By comparing the actual results to your budget, you will have a good idea of how your business is performing overall.