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The small business guide to the numbers

Article provided by Lulalend

All about the numbers

No matter what business you’re in, you need to stay on top of your numbers if you want to survive and grow. That means putting rock-solid accounting practices and systems in place. We consulted with our friends in online accounting, DoughGetters, and put together these need to knows:

Keep proper records

The importance of good bookkeeping can’t be overstated. Having a reliable picture of your income versus costs tells you if you’re profitable or if you’re likely to run out of money (even profitable businesses sometimes do). It will also make tax season far easier because you’ll have all the information you need to lodge your tax returns.

Check your books – often

Keeping your eye on the numbers lets you see where you’ve been, where you’re at, and where you’re heading as a business. But your books need to be accurate, and this means keeping them up to date and reconciling them with your bank statements.

Count your receivables

One of the most important numbers to get control of is your Accounts Receivables: the money owed to you by customers. In an ideal world, a customer would pay you, you’d allocate this amount to the account and mark it as paid. In reality, orders are coming in all the time and your customers are part paying, returning things for credit and making payments with no references. If you don’t have a proper accounting system, things will get messy quickly. So make sure you have one in place.

Create accounting reports

There are dozens of accounting and management reports you can use to assess the performance of your business. But the most common are:

  • Profit and loss report: A comparison of income and expenses so you can see if you’re making money.
  • Balance sheet: Identifies what your business owns (including cash) versus what it owes.
  • Cash flow report: Shows if you have more or less cash after all the sales, expenses, and any lending activities have been boiled down.
  • Business dashboard: A live online report tracking your choice of business performance metrics.

This information will help you make decisions like whether or not to borrow more money, whether or not to hire help, which products or services to focus on, and which ones to let go of. Online accounting software makes it simple for you to create these types of reports

whenever you like. It always helps to have an accountant involved in the deliberations that follow.

Get friendly with your accountant

You might not think about hanging out with your accountant often, but you should. Your accountant has vital information to share about your business, so make sure you choose someone who doesn’t use too much jargon so you can understand what they’re saying.

They can help you with tax, interpret accounting reports, show you which numbers really matter, and suggest next steps for your business.

Never be afraid to ask your accountant to explain something, even if it feels like a really basic question. The more interest you show in the numbers, the more enthusiastic your accountant will become about your business, which is a really good thing for you.

Be tax smart

Business costs reduce your taxable income and therefore your tax bill, so make sure they’re all accounted for. Quality bookkeeping is vital here.

You need some accounting knowledge to work out all your costs. For example you can claim wear and tear on assets, and the diminishing value of intangible assets – but you have to follow specific rules.

Getting a tax professional on your side is a solid move but don’t wait until tax season to hire an accountant. Get them involved early on so you can supply all the records they need to make doing your tax relatively painless.

Don’t forget VAT

You’ll be surprised just how many businesses forget to pay VAT each month. Taking your eye off this number can really come back to bite you, so think about creating a separate bank account that you pay VAT into so you don’t ever get caught short.

If you ever need help at month-end (perhaps you’re waiting on a customer to pay), establish a line of credit with a lender who can help you bridge this payment gap. Pick one who understands your business challenges. Be disciplined and pay back what you owe as soon as you’re able.

How a business grows

As your friends in funding, Lulalend are here to help you with fast and easy business finance. That said, it’s still good to plan for your needs, so consider these life-cycle stages of a business

Birth and baby steps

Converting great business ideas into real products or services requires start-up capital. This could be for equipment or for living and operating expenses while you work to get your business off the ground.

Start-up capital usually comes from:

  • Your own savings or investments
  • Friends and family
  • Outside investors

The teenage years and young adulthood

Your business needs to grow until it can operate at scale, so future cash flow shortages are inevitable. In this phase you must lock down the key strategic pillars of your business that will help you achieve long term profitable growth, a high-quality product or service, and the ability to attract and retain the best people.

Adulthood and beyond

Your business matures when it generates its own sustainable cash flow. Give yourself a big pat on the back if you achieve this milestone, because starting and running your own business is not easy. The high mortality rate of businesses proves this.

How do you achieve sustainable cash flow? By making sure your sales (income) exceed your costs of doing business. In other words, by making a profit.

This can only happen if there’s a sustainable market for what you’re selling and if your value offering is unique enough. You also need to know the maximum price you can charge before your value proposition is no longer attractive to customers.

Why some businesses don’t survive

One of the main reasons your business may battle to reach or survive adulthood is not taking into account your personal costs as the owner. Do you make sure you pay your business bills and staff salaries, then consider the remaining ‘profit’ your ‘just’ reward? If you do, you don’t have a business. One day when you want to retire, you’ll struggle to sell your business for a price you’ll be happy with. As a business owner you are actually ‘employed’ by your customers, so make sure you get paid properly – so that your business becomes and stays a productive and value-adding ‘adult’ in the economy. You’ll have achieved this when your business can operate without you being there for long periods and still generate a well-deserved profit.

To reach adulthood, do two things from day one:

  1. Make sure your cost of involvement in the business accurately reflects in the sales price of your goods and/or services.
  2. Actively look for ways you can replicate and even replace yourself in the business as soon as possible. You can work in your business as long as you want, but have the flexibility of being able to work ‘on’ it too. Working ‘on’ it means having more time for creative thinking which is vital for keeping your business competitive and relevant to customers.

How do you price the cost of your involvement in your business if you sell a service?

Step 1

Work out the minimum rand value of what it costs to cover your personal expenses, including a quality education for your kids and well-deserved holidays. This value represents a cost to your business, whether you take it as cash or not. Only once you’ve included it in your cost analysis will you get a handle on how profitable and mature your business really is.

Step 2

Work out what every hour you spend costs your business. Do this by dividing your monthly cost (as determined in step 1) by the number of work days in a month, and then by the number of work hours in a day. A general rule of thumb is to divide your cost by 20 days and then by 8 hours. Example: if your monthly cost is R100,000, your hourly cost will be R625 (R100,000 / 20 / 8).

Step 3

Understand what it costs you to deliver a service. Tracking your time is important. In some cases the service you offer may be fairly standard, so you can quite easily predict the time you’ll spend. But for all other situations keep an accurate record of your hours spent. There are many award-winning cloud based apps available to help you do this, for example Xero Projects, Harvest and WorkFlowMax. Your cost of service delivery will equal your time logged multiplied by your hourly cost rate. Example: if you spend on average 10 hours to deliver a specific service, the cost will be R6,250.

Step 4

Remember overheads and how they affect profit! If you charge your client only R6,250 for a service of 10 hours, your business will be making a loss because you haven’t allowed for overheads. To properly determine your sales rate, multiply your hourly cost by 3 or 4. In other words, quote a fee of R18,750 (R625 x 10 hours x 3) for a service that will cost you R6,250 to deliver. That way, after paying yourself a well-deserved salary, you will have enough margin left to cover your overheads and earn a profit to reward yourself for the risk of running your own business.

Step 5

Sell value, not time. When negotiating with customers, don’t fall into the trap of convincing them why you need to spend 10 hours providing your service. Instead, let them know that the R18,750 you want to charge is an absolute bargain considering the value you’re delivering.

If you make and sell products, follow step 1 above and then include that cost in your break-even analysis when you determine the minimum gross margin you need to achieve.

More about Lulalend

Lulalend is a new-generation lender that provides funding for small – to medium-sized businesses. Applying for finance from Lulalend takes place completely online. Our scoring technology evaluates the real-time performance of your business so that you get the best possible funding. You get a decision in minutes and our costs are transparent and easy to understand. In most cases we will have the funds in your bank account within 24 hours.

Lulalend is a proud Partner of the NSBC