To start a business is actually very easy. To successfully manage a business and to see to it that it is financially viable
is not that easy. To ensure that your business would survive financially you need to have a certain degree of business skills. Statistics have shown that the majority of business which is not surviving, normally close down within the first 12 months of operations.
Therefore, it is imperative to have certain business skills to ensure your business would survive the onslaught from day one. One can reason why do I need business skills? I have my on
bookkeeper or accountant for which a reasonable fee is being paid. Good for you! But remember a bookkeeper or accountant is only there to do your books – not to manage your business. With a good bookkeeper or accountant behind you are possibly on the right track.
While you might be exceptionally creative and artistic and good at selling, to survive in business you must have basic business skills. It is certainly a very good idea to have a bookkeeper or an accountant as a consultant, but it would be well advised to take a course in business management so that you understand what is going on. Remember your are responsible for your business and knowledge is power.
With a basic skill or knowledge of business practices, it is fortunate to know that there are a series of tools to assist you to spot a business’s strengths and weaknesses at a glance. These tools can also be used in benchmarking exercises as well. Benchmarking means you can compare performance figures with those achieved by your competitors or published as industry standards.
It is imperative to ensure you are empowered to utilize or understand the application of the following useful tools: Breakeven analysis: This tool enables you to assess whether your business is trading in the neutral. This means that the trading activity cover all costs and expenses but creates no surplus. When your start a new business or even adds a new product line, patience is needed. Most new projects incur losses initially but the breakeven point must be reached in the foreseeable future. This tool therefore assists you in determining it and the calculation is as follows:
breakeven sales = total operating expenses x 100: gross profit percentage.
Current ratio: This ratio expresses the business’s ability to pay its current
liabilities out of current assets. The formula is as follows:
current assets: current liabilities. Current assets consist of stock, debtors and cash. Current liabilities consist of trade creditors and short-term loans. Interpretation of the resulting figure depends on the industry sector. As a general rule however, a ratio of 2:1, meaning that for each dollar you owe, you have 2 dollars in current assets to pay for it, is considered very good.
Acid test ratio: This ratio is also known as the quick ratio. Its purpose is similar to that of the current ratio, except that it is more severe. The value of stock has been stripped out of the equation to provide a more realistic picture of a business’s ability in the short-term. The formula is:
(current assets-stock): current liabilities. Stock turnaround ratio: This ratio measures the frequency at which stock expressed in monetary terms, is sold. The formula is:
stock on hand (for resale purposes): cost of sales for the year to date x 365 . A high frequency of stock turnaround means that stock moves rapidly through the business. Little or no capital is tied up in obsolete stock.
Debtors outstanding ratio: This ratio measures the number of days it takes you to collect outstanding debtors balances. The formula is:
debtors at month end: credit sales for the year to datex 365. This ratio is very important. You may have based your cash flow projections on the assumption that your customers adhere to the terms of 30 days net. The question is: do they? Or do they take longer? If so, and you let it go unchecked it can undermine your ability to meet your own obligations.
Although your bookkeeper or accountant may assist you with the compilation of financial projections and interpretations, it is your business and you need to stay involved every step of the way. Competition nowadays is so intense that to operate a business successfully without a solid understanding of its financial well-being has become almost impossible.