Whether you mass-produce tea towels or produce bespoke bicycles to order, people go into business because they enjoy their work, want to build a better life and make a difference. Whatever their motivation, no one takes on the risk of running a business to spend their lives managing accounts, raising invoices, or reconciling bank statements.
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| Why Entrepreneurs Need to Have a Grasp Their Numbers?: eAskme |
It is common among many small business owners to dislike doing their accounts and managing their finances so much that they can be completely unaware of their financial position.
Instead, they leave all that work to their accountant so that they can meet their legal obligations to report their earnings to the government.
However, doing your accounts is much more important than that. Sure, it is a legal requirement to file taxes, but it’s also a legal requirement to wear clothes, but we also do it to stay warm and look good.
Numbers are essential in just about every area of life. In gaming, roulette numbers change depending on the variant, with European games containing 37 numbers and Americans having 38.
This additional number changes the house edge considerably and is something that players need to understand when choosing which one to play.
The same is valid for baking; getting the right proportions of ingredients is vital if they’re wrong, your cake or pastry may not rise, have the wrong texture, or taste strange.
So despite knowing this, many entrepreneurs choose to bury their heads in the financial sand. Here’s why that may not be a good idea.
Understanding Your Financial Position Leads to Better Decision Making:
Do you know which of your products makes you the most money? You may think that it is the one you sell for the highest price, but is that true?
If you don’t know this for sure, how can you know which products to promote more?
Every product or service you sell has a cost and a sale price. The difference between the two is the gross profit.
To give a fundamental example, if you’re selling pencils for $1 each and cost you $0.20 to buy, your gross profit per unit is $0.80. Expressed as a percentage, this would be 80%.
If you also sell pens at $1 each, but they cost you $0.40, your margin is $0.60 or 60%.
In this instance, you would make proportionately more by selling the pencils, all other factors being equal. Therefore, it could be good to promote the pencils more than the pens.
Knowing Your Numbers Let’s You Plan Better:
Are you struggling to meet demand? You might consider hiring more staff and expanding to another premise if you are.
However, do you know if you can afford to take someone on?
It is a big financial commitment to pay someone’s salary, and there’s no way to delay it like with some of your invoices. If your staff isn’t paid, you can expect them to stop working.
It is, therefore, vital that you understand your current financial position and have a forecast of what it could be in the future so that you can be confident that you can afford to enact your expansion plans.
A cash flow forecast is crucial as it gives you an educated look into the future.
If it shows there will be enough cash to pay for your new staff or the extra overhead of another premise, you can be confident in your decision.
A Firm Grasp of Your Numbers Can Alert You to Problems Early:
Cash flow forecasts are also several tools that can help you spot problems early.
They do this by providing a way for you to measure actual performance against your predictions.
If the reality is significantly and consistently lower than what you thought would happen, you can diagnose the issue and take action to correct things.
For example, lower sales might be because your prices are too high or a sign that you need to do some more marketing.
But if you haven’t got a tool for measuring your performance, you can’t know you need to do something.
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