How To Master Your Business Finances

As an entrepreneur, you will always be confronted with issues related to money, money management and profitability.

Here are a few frequently asked questions (FAQs) by other entrepreneurs and the responses to these FAQs. In providing these responses, it is expected that you will come to fully grasp the mind-set requisite to mastering your business finances.

Q1.       At what point should I start preparing financial statements for my business?

R. ​Financial reporting is an integral part of your business. It is not an event that you are planning    for; it is the report card of the business.  I find people saying that they want to wait till they are bigger before they start preparing financial statements. This is an erroneous concept. From the moment you decide to start running your business, accounting for that business comes into the plan. It is not an after-thought and should be given the priority it deserves. Think of all the big brands you love; they got to where they are by being financially responsible.

Q2.       If I keep a notebook that records my sales and expenses, isn`t that enough?

R.          Having a notebook where you record sales and expenses can be a first step to accounting for your business, but it is definitely not enough.                                                                                                                          

Sales and expenses are just two elements of the financial statement. What happen to Assets, Liabilities and Equities? The truth is this, we`ve embraced technology in several aspects of our lives; notably communication. The guy who is stuck on his notebook for sales and expenses has his telephone contacts coordinated and stored on his phone, easily retrieved at the tap of a button and most likely backed up on the cloud. One has to wonder why that same enthusiasm hasn`t been adapted in his recording of business transactions. 

There are several easy-to-use software that can track all elements of your financials and what’s more, information can be retrieved at the click of a button. So imagine a lender or provider of equity wanted to see your last two years business performance, it would be utterly remiss to hand him over stacks of notebooks when it could all have been cohesively summarised into your Statement of Profit or Loss, Statement of Financial Position and Statement of Cash Flow.                                      

We need to prioritise accounting automation as a way of easily obtaining reliable, financial reporting. 

Q3.        How does accounting for my business help my business grow?

R.           Now we all know that whatever doesn`t get measured never gets done. Imagine telling yourself you want to lose weight and never look at the mirror or you never get on a scale.How do you know if you are making progress? In the same vein, accounting for business guides the entrepreneur in ascertaining how far or near he is from his financial goals. His growing popularity for instance is not the same as profitability. If there are time wasting activities that are not translating to increased revenue, proper accounting will make him course-correct. With proper accounting the business owner can tell how much more in revenue is required to meet the desired profit and as a result, strategic actions can be takento realise this growth in revenue.

Q4.       What do I do if I cannot afford a qualified accountant?

R.       If you are just starting a business, the fact of the matter is that you have got to plan for accounting for your business. If however you are unable to afford a qualified accountant, then you can outsource the function. You are likely to pay half the cost of keeping a qualified accountant full time if you go this route. Alternatively, you can decide to spend the timeto learn to do it yourself. It is a time consumingactivity and it shouldn`t be an activity that you handle yourself over the lifetime of your business. As a business owner, your primary activity is to drive sales and customer retention. So have a plan in place to drive sales to the extent that it can cater for the cost of having your own accounts handled professionally.

Q5.        How can one who is into the production of food /drink keep a good record without having the slightest knowledge of bookkeeping and finance, and have presentable reports for potential investors?

R.         Depending on the pedigree of your investors, reporting requirements will differ. Also your relationship with the investors may also influence how much information is required of you. However, I will assume an arms-length relationship, and in such a case, the information required of your business will be as granular as possible. Your lack of knowledge of bookkeeping and finance is not going to persuade them to part with money. You would therefore need to get a qualified accountant to work with you in putting your financial statements together. 

Having an accounting of how you have spent your own funds in business gives a perception of financial responsibility and integrity. Every investor wants to know that they are investing with a financially responsible entrepreneur. 

Q6.       What is the difference between Gross Profit and Net Profit?

R.          Gross profit is determined by deducting direct costs (cost of sales) from sales. Net profit on the other hand is the bottom line. It takes account of not just cost of sales, but overheads as well. So, while it may be exciting to sell your fabric for N10,000.00 after purchasing it for N5,000.00, the real excitement will come if after catering for the shop rent, salaries, internet, etc. you still have some money left. Summarily your gross profit per unit, multiplied by the number of units you sell should cover all other business overheads.

Q7.        How do I know if the return on my business is good enough?

R.           Return on your business can be measured by the return on investment (ROI) ratio, which is your net profit divided by your capital employed. Your capital employed refers to the total of your equity and long term debt provided in running the business. The return on investment is typically measured in percentage points. So when you compare the net profit from your Statement of Profit and Loss with the capital employed seen in your Balance sheet, you can ascertain what this ROI is.                                                                                                                        

The simple benchmark would be comparing that ROI with the rate of return on a risk-free investment like a fixed deposit investment, for instance. You do absolutely nothing and you could possibly get as much as 10% per annumon your fixed deposit. It would only make sense that for the amount of effort you put in running your business, you should get more than that 10% per annum. Hence you hear some people say that they will rather trade with their money than leave it in the bank. They have done the comparative return and favour the former as an option.

Q8.        What kind of business decisions can Imake if I have financial statements?

R.         There are several business decisions you can make with your financial statements but I will just touch on a few. 

Your financial statements can show you whether or not your marketing expense is generating commensurate increase in sales. In comparing both figures, you can decide to either change your marketing methods or stick to them.

Also, you can decide how much of an increase in salary you can afford to offer your staff by comparing the proposed increased cost to the current level of earnings and net profit.

Another interesting decision you could make is how much more or less to spend on businesstravel, by comparing its impact on your revenues in past periods.

The financial statements also jog your memory on obligations to settle. In looking at the liability side of the financials, you can make decisions relating to priority of payments.

Q9. ​How does budgeting apply to my business?

R. ​A budget is to a business what a blue print is to a builder or architect.

​In running the business, there should at every time be a plan for revenue and expenses as well. Having the plan gives coordination to the activities the business will embark on in the course of the period; whether monthly or yearly. A budget helps to eliminate time wasters, time wasting activities and drives performance of the various aspects of the business.

​Budgeting with regards to expenses provides the discipline required to retain as much as possible in the business, and keeps frivolous or lower priority spending at bay. In so doing, the business can plough back retained funds into future expansion activities or have a buffer to absorb shocks arising from government policy, currency risks and so on.

​There are many things good to have in business, but they can be evenly paced so that the business and business owner do not break from the strain.​        

Q10.​ What do I do if my business cannot pay me a salary every month?

R. ​In planning revenues for your business, you should factor in a monthly compensation for yourself. This compensation may not be as high as what your friends in paid employment are receiving, but it’s a start. The figure can increase as the business revenues increase.

​The thing you shouldn’t do is to take money indiscriminately from the business to fund your personal expenses. Any personal expense you need catered for should come out of your monthly compensation.

​Furthermore, at any point where the business is low on cash and you cannot pay yourself that monthly sum, you need to make a provision for it and settle this amount owed to you when there is cash available.

​For instance, if your compensation is N50,000.00 (Fifty Thousand Naira) monthly and the business is low on cash at the end of April, when you get some funds in June, say N500,000.00 (Five Hundred Thousand Naira), what you are to pay yourself in June is N150,000.00 (One Hundred and Fifty Thousand Naira). That is, N50,000.00 multiplied by 3 months (April, May and June). It would be remiss to take out N250,000.00 because you think you deserve it!

​Finally, business owners who do not compensate themselves from the business often end up treating the business as a hobby rather than an enterprise which should have structure and co-ordination.

Q11. ​Do I pay VAT even when my business is making a loss?

R.​ Value Added Tax (VAT) is actually a tax on sales and not a tax on profit. It is expected that as long as you are selling an item or service subject to VAT under the tax laws governing the country, you are to charge you customers 5% of the selling price and remit same to the tax authorities. If your excuse is that you did not charge your clients VAT because you didn’t know you were supposed to, it will not absolve you of your VAT liabilities to the government. 

​There are other taxes applicable to the company’s profit like Company Income Tax and Education tax. However, as stated above, the VAT is a tax on sales. Even if you make losses month on month, you are still to remit your VAT.

by Jovita Madojemu; the MD/CEO of Pundit Bookkeeping Services, a virtual accounting company that provides accounting services to SMEs. 

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