The main reason why a business may fail is poor cash flow management. Even a well run business can get into trouble if they have no way of ensuring that their bills are paid on time or at all, and do not have sufficient reserves to keep going until their next payment arrives. In this article we will look at how understanding the costs involved in running your business and tracking your cash flow can help you to manage it successfully.
Understanding Your Costs
In order to run a successful business, you must ensure that the cost of doing so is less than the return from doing so. In other words, you have to understand how much it costs to produce each unit of output from your business. Here are some costs that you should consider when analysing your business:
These are predictable and do not change in the short term. Your rent, utility bills and insurance costs will be fixed in the short term and will remain unchanged until they expire or if you renew them for a similar value in terms of money and time.
These are costs which increase or decrease depending on how much your production process is required to produce at any given time. If you produce less, then you will incur less variable cost; whilst if demand increases significantly, there may be a need to take on extra staff or rent more space. Variable costs can include packaging, raw materials, labour costs and transport.
Semi Variable Costs
These are variable costs which only increase when the volume of production increases significantly. Additional staff would be a prime example in this case. You will have to consider taking on extra staff even if your business is not producing enough units at that moment, in order to ensure they are there when you do need them.
These are costs which only incur once a business increases production by one unit. For example, if your business produces 100 bottles of sauce per day, extra crates will only be required every time the production line is increased by an additional ingredient or bottle of sauce. Marginal costs are often ignored when analysing the costs of production. But in reality they are just as important to understand because ignoring them can result in some very expensive mistakes being made.
Tracking Your Cash Flow
To ensure that your business remains successful, you need to have a strong understanding of how much money is coming into and going out of it. Tracking your cash flow does not have to be difficult. Many small businesses decide to try using software tools in order to manage this process on their behalf, but it is still important that you are aware of what is happening with your business’s cash flow. Here are some tips on how to do this successfully:
Keep an Eye on Your Banking
One of the most important aspects to track with your cash flow is what you are paid and how much you have to pay back. If this balance does not match, it can be a sign that something is wrong. Keep close track on your bank accounts, as well as any other sources of finance for your business. It may help to occasionally print out the transactions which you have made and store them away. If there is a discrepancy or a payment that does not seem to make sense, then you should look into it immediately.
Evaluate Your Invoices
Whilst it may be easy enough to accept the invoices that come through for your business, you must make sure that you are not getting ripped off in the process. If you are paying for anything more than it should be, you need to make sure that you are not being overcharged.
Keep Track of Your Resources
The most important resources which your business will use is money and labour. You need to keep track of both of these so you know what is required to keep things running smoothly. If any resource falls below a certain level, it could be time to find out where this is coming from and if there are any potential replacements that can be made instead.
The cost of your business’s resources should include the following:
- This includes all of the materials which are used in your business, including the purchase price.
- This includes all of the salaries that need to be paid to anybody associated with your business, including any part-time or temporary staff.
- A simple way to calculate this is to look at how much money you make per hour and multiply it by the number of hours worked by each staff member per year, including your own time.
- The cost of any resources which are not used on a daily basis should be divided by 365 (the number of days in the year) and included as an annual resource. This will include things like salaries for part-time staff who do not work every day or materials that are only used on occasion.
How do I price my products?
You need to think about your market and the prices which you see your competitors charging for their goods or services. You should also involve all of your staff in this process so that they feel as though they are part of it and will therefore be more willing to promote those prices on a day-to-day basis.
Using a Calculator to Work Out Costs
If you are working on your own, it can be very difficult to work out how much each of your products or services should cost as you go along. In order to make this process as easy as possible for yourself, you should invest in a calculator that has a percentage feature on it. You will then be able to work out the percentage increase or decrease in price for each year and adjust accordingly.