How to master my business finances

"Annual income twenty pounds, annual expenditure nineteen, result happiness. Annual income twenty pounds, annual expenditure twenty-one, result misery." - Charles Dickens

Finance and accounting are not the 'dark arts' that many business owners, leaders and entrepreneurs often consider them to be. Rather, they are the powerful winds that blow away clouds of uncertainty, filling the sails of the organisation with clarity, confidence, purpose and direction.

Over 800,000 new businesses were registered in the UK in 2021. This is an incredible number given the challenges the global economy has endured in recent years. Sadly, research has shown that of those around a quarter will fail in their first year and nearly two thirds will not make it to their third birthday. Sobering thoughts indeed for a business owner, but many of these failures are entirely avoidable.

The cause of many business failures can be identified, quantified, and rectified with a firm grasp of financial concepts and the application of a few simple tools. Note I said 'simple' tools, not the endless spreadsheets and pivot table often used by accountants and their teams. I have yet to meet a business owner who succeeded in life and business without mastering business finance — in their own way — and this is a key area of development for most business leaders and entrepreneurs.

Create the business that gives you the life you’ve always dreamed of…

Here are seven finance fundamentals to help you get to grips with your business finances

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Get over your irrational fear of business finance

These words typically epitomise most of the early conversations I have with our members and clients who are just getting to grips with their business and personal finances: "but I'm useless with numbers" or "I'm terrible with accounts" or best of all "I leave all of that stuff to my accountant." Does this sound familiar?

In reality, we are all incredible with numbers, just in our own unique way. We must find the right methodology to overcome these self-imposed barriers and realise there is a highly skilled financial whizz in all of us, waiting to take control of the choices we make in life and business. Get your head out of the sand and choose that there is a way forward, we have just not yet found the right path for you.

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Put your own oxygen mask on first

This may sound like quite a bold challenge — and it is meant to be so. As humans we are creatures of habit, behaving in the same way in all aspects of life and business — it is the easiest way for us to exist. If we want to create positive, effective habits in our businesses, the best way to start these is in our own personal lives — starting with our finances.

How do you currently manage your personal finances? Often this can be a reflection on your business finances. Do you leave the household finances to your spouse or significant other? If so, chances are you leave the business finances with your accountant. Create personal financial goals for yourself and your family. Create a budget that allows you to save and plan to buy the things you really want. You will start applying the same tools in your business.

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Understand your financial statements

In order to create a powerful plan for future financial success, we must first clearly understand where we are right now. The three essential financial statements for this purpose are:

  • The Statement of Financial Position or 'Balance Sheet'
  • The Statement of Profit or Loss often referred to as the 'P&L'
  • The Statement of Cash Flows

Each of these statements provides a powerful insight into the financial health and performance of your business, the potential value of your business and the asset it owns and where you are using your resources such as cash. Work with your coach to decode these powerful statements and use them to make powerful decisions.

"An investment in knowledge pays the best interest." Benjamin Franklin

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Create BHAGs — Big Hairy Audacious Goals

Once you have decided upon the things you want to have in your life, now is the time to create powerful aspirational business goals that will enable you to achieve your personal goals. It could be that you want to enjoy four family vacations a year in your beachfront holiday home. If this is the case, what does the business need to generate in profits?

Once you have mapped out your profit goals, work your way back through the business numbers: understand the required turnover, profit margins, overheads, staffing, professional services etc. Now create goals for each of these individual areas of your business, fully aligned with the overall financial goals of the company. Continue this process until each individual team member knows the results they are expected to create in their roles.

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Proper plan and preparations prevent pathetically poor performance

Now you know where your business is and how you got there and you have identified the BHAG financial goals for the organisation, you can start to have some fun creating the roadmap to your success. Few businesses achieve massive success by accident. Entrepreneurs may make the odd 'luck guess' but this is often based on experience and expertise. Those who plan intricately, typically succeed.

Combine your knowledge and understanding of the historical performance or your business taken from your financial statements with the goals, milestones, and key results you have created that lead to your success and use this to create a i-year, then 3-year, then year financial plan. This is not as daunting as it may seem, in fact it is one of the most fun and liberating parts of being an entrepreneur. Just keep asking yourself 'what if..."

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Turnover is vanity, profit is sanity, cashflow is King / Queen

Did you know that experiencing massive, unexpected growth in a short space of time can actually put you out of business? Sounds crazy, doesn't it? Imagine a business orders large quantity of goods to service a significant increase in sales but doesn't have sufficient cash reserves to pay for them before they receive the income from customers. This is known as 'overtrading.'

Many successful business owners who have failed to understand the cash implications of their businesses have experienced this situation. Turnover and profit are accounting measurements, cash is the reality of your business. Use your financial plans to anticipate future cash movements in and out of your business using a cash flow forecast. Profit rarely equals cash - even when it does it is a coincidence. Understand your 'cash gap' and use tools such as 'scenario analysis' to understand the impact a decision may have on the cash position of your business.

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If the plan doesn't work, change the plan — but never the goal

As entrepreneurs and business leaders we must put aside our sentimental attachment to the 'the way we have always done things' and accept that change is not only desirable, but also essential. Like any journey we take in life and business, there will be twists and turns, holes in the road and the occasional fallen tree.

One popular definition of insanity is to continue with the same course of action and expect a different outcome. We must know the time to stop, take stock and reflect on what got us to where we are. Ask yourself 'are we still on track?' and 'are we still fully aligned?' Take bold decisions to change the route if required to help you reach your ultimate destination. Your plan should be an empowering tool, not a cage.

In summary

I hope you can see that the real value of mastering your business finances is not in understanding how the concepts and frameworks actually work - that's for your accountant to decipher. The real value is in understanding what stories the information contained is telling you and how to use these powerful insights to create your own desired version of the future.

Business finance is as easy or as complex as you choose for it to be. You may have a detailed, analytical mind and want to get in to the nuts and bold of each transaction. That's ok, and the rabbit hole goes as deep as you like! However, it is also possible you want to understand the headline numbers and what meaning they convey. In my opinion, this is the level at which entrepreneurs and business leaders should operate — visibility and clarity.

Work with your coach to understand your current capabilities, requirements and which financial tools and frameworks will offer the most value to your journey. Remember, your numbers are the truth of your business and the sooner to grab the reins, the faster you will reach your destination.

If you would like to discuss your business plan and make sure you are set up for success, book a FREE coaching session with one of our certified Business Growth Specialists and discover how to unlock your full business potential.

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See how business leaders just like you have partnered with ActionCOACH NextLEVEL and used our proven tools, systems, and frameworks to achieve dramatic, sustainable personal and business growth.

Since working with ActionCOACH, James and Sam have seen and increase of 116% in net profit with 8 new team members onboarded. They've achieved a better work life balance and are able to work on the business rather than in the business.

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The company has been shortlisted for 2 national awards and James is able to do the school run and spend more time with his daughters - "If I didn't have my ActionCOACH I don't think I'd be here today"

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