A striking but often overlooked issue emerges for business owners; the lack of financial literacy.
Despite their proficiency in running their ventures, many entrepreneurs stumble when understanding the financial intricacies underpinning their success. Cash flow management to the all important breakeven point are imperative to make a profit.
The Role of Cash Flow
Cash flow is the lifeblood of any business. You might be diligently raking in revenue. However, if your bank account resembles a barren desert, it's a tell tale sign of a cash flow problem. What's paramount is foresight. Ensure you have dedicated accounts for forthcoming obligations such as GST payments and employee leave. This strategy guarantees you'll always have the funds to fulfil your future financial commitments.
A common pitfall we've witnessed is the over reliance on a single major client. It takes just one large client to delay or even neglect payments, and suddenly, your business faces the treacherous waters of cash flow problems. Maintaining consistent cash flow balances income and expenses, providing a financial safety net during turbulent times.
The BreakEven Point
Understanding your business's breakeven point is akin to holding a map to profitability. It's the threshold at which your revenue covers all your costs. You'll need two fundamental formulas:
1. BreakEven Point in Units Sold: Divide your fixed costs by the difference between the selling price per unit and the variable cost per unit.
2. BreakEven Point in Sales Dollars: Divide your fixed costs by the contribution margin percentage, where the contribution margin is the difference between the selling price per unit and the variable cost per unit.
With these calculations, you can set clear objectives and strategies for your business. Knowing your breakeven point informs pricing decisions, cost management, and overall financial planning. Too often we find that business owners small and large and quite often; successful don't have this at their fingertips. Put simply, if you don't know how many units of a product you need to sell to break even and make a profit, you are steering a ship with a blindfold on!
Setting Goals and Navigating with KPIs
Goals and Key Performance Indicators (KPIs) are the North Star of your financial journey. Define your income targets and profit objectives. With this information, you can calculate the precise number of products or services needed to achieve your desired profit.
Creating Your Roadmap to Financial Success
Turning goals into reality necessitates a roadmap. Strategies may include adjusting prices, reducing costs, introducing innovative products or services, and fine tuning your marketing tactics. An online presence and word-of-mouth referrals can also bolster your business.
Be sure to always seek financial advice from a qualified financial advisor or ask your accountant, tax agent or bookkeeper!
Interested in boosting your marketing or learn more about how to amplify your Digital Media efforts? Check out the Digital Solutions Program, based in Victoria, the program is for eligible small business operators and we are very humbled to be mentors for the program. You can check it out here: digitalsolutions.
Based in Geelong, Victoria- The Doorway Group provides Business Mentoring and Digital Media Assistance all over Australia. We love what we do; working with small business owners to elevate their lives, reach their goals and be inspired!