Financial literacy is important for everyone but it’s essential if you’re in business.
Most businesses fail due to lack of cash, not profits
One definition of financial literacy is “The ability to make informed judgements and decisions regarding the use and management of money”.
For business, it is understanding where your money is coming from and where it is going. It’s also knowing how to use this information to make informed decisions, resulting in better outcomes.
So, it’s crucial you understand your cash flow and keep an eye on it every day.
Our purpose at Xero is to help make life better for people in business. So I want to highlight three tips for new business owners.
A bank reconciliation ensures all your bank transactions are recorded and categorised in your business’ accounting system.
If performed daily, or at least weekly, you’ll have an accurate and timely view of your cash position. It also tells you how your money is being earned and spent.
You can quickly gauge whether you can afford to pay your bills and employees. You can also produce financial reports to see what products and services are most profitable as well as what expenses need to be reigned in.
Set yourself financial goals for the business and write them down. Once you understand the ins and outs of your business, you can use this as a basis to build your budget.
You can compare your actuals with your budget to help stay on track, and also make adjustments if your circumstances change. For example, you could shop around at different suppliers to see who has deals or offer discounts to cut down on costs.
It’s a useful tool to keep your business moving forward and help with making informed decisions.
Profit or loss
A key report for businesses is the Profit and Loss statement – also referred to as an Income Statement.
The Profit and Loss statement shows how the business has performed during a certain timeframe – it takes all your income and expenses and summarises them to give you either a profit or a loss figure for the period.
Run this report monthly to keep an eye on how well your business is doing. You can also compare it with previous periods to see how you’re tracking. You can make it even more useful by comparing it with your budgeted figures.
If you’re new to business and you’d like to learn more about the basic financial principles including business structure, taxes and documents, join our weekly Financial fundamentals for your business webinar (available only in New Zealand) from now until 5 November 2020. You’ll also learn about a chart of accounts, the bank reconciliation and key financial reports.