10 Reasons Why Understanding Your Financials is Key to Growing and Controlling Your Business

Running a business can be challenging and exciting. If you are growing, regardless of which sector you are in, you’ll reach the stage where the business can’t just be controlled by what is in your head. As the business grows, eventually you will need to implement some structure and systems if you want to continue on that upward trajectory, without imploding.
We see many business owners who run their finances based on sales and cash in the bank. This isn’t ideal, but you can get away with it when the business is smaller, its cash demands are more predictable and you as the owner are close to what is happening.
However, without implementing robust financial systems that will provide you with accurate, timely and reliable financial information, you’re creating a barrier to growth and may even be putting your business in danger of a terminal event, such as running out of cash.
Where is that stage? It varies from business to business and across industries, but somewhere between £500K and £1.5M is often the point where the systems which worked when you started and grew the business, suddenly can’t cope with the demands of running a larger organisation.
That’s true for your financial systems too. Relying on your sales number and cash in the bank isn’t going to cut it. Understanding your financials is key to long term sustainable growth.
Even many experienced business owners who have been in business for many years don’t have the best grasp on what their financial statements are telling them. They may understand the profit and loss ok, but still don’t really understand the balance sheet and are often afraid to ask their accountant for fear of looking a bit stupid! But, that’s what we’re here for – to help you understand your financials, so that you can make better decisions for the long term health of your business.
Here are ten reasons why mastering your numbers is essential for growth and success.

1. Understand the lingo

Like any profession, accountancy can be full of terms that seem like jargon to the outsider. You might have heard some of them – gross profit, net profit, costs of sales, overheads, accruals, prepayments, etc. Really, they are just short hand for a concept which could take a couple of lines to explain.
Don’t be intimidated. Getting some understanding of these concepts can really help you with understanding your financial statements.

2. Set realistic goals and measure them

If you haven’t thought about your goals, how are you going to decide where to allocate your limited resources, whether that be time, money, people or skills?

Getting your goals clear allows you to think more clearly about how to achieve them and where to allocate your resources. If you don’t think about your goals, the danger is that you burn resources on ideas and work that doesn’t help you achieve your goals

3. Cash flow is king

I know, it’s a bit of cliché, but that doesn’t mean it isn’t true!
Even profitable businesses can fail if cash flow isn’t managed effectively. Knowing your inflows and outflows and any pinch points coming up, ensures you can be prepared for the peaks and troughs. You’ll sleep easier if you are not worrying about how to pay the next payroll, pay your tax or that unexpected repair or equipment purchase. Proper cash flow management keeps your business resilient and agile.

4. Know what drives your profit

Sounds a bit daft doesn’t it! Even if you are only producing year end accounts, they are enough to tell you whether you were profitable last year (in the past).
But not all products, services, or clients contribute equally to your bottom line. Knowing your financials can help you pinpoint where the real money-makers are and this might be a surprise. Often there will be products or service lines that aren’t making you much, or worse are actually losing you money. Imagine what your business could look like if you knew your most profitable products or service lines and focused on these.

5. Control costs without compromising growth

Growth often brings increased expenses, but some may not be necessary. By analysing your financials, you can identify wasteful spending and reinvest those savings into areas that drive revenue. As you get bigger, there are often expenses which get overlooked, like subscriptions or software that you are paying for but aren’t using. If you have a team, why not assign one of your team to look after each category of expense? It takes the burden off you and will help your team feel more valued.

6. Navigate growth confidently

Scaling a business requires resources. This is often identified as the most challenging stage of the lifecycle of a business. Growth requires investment in staff, equipment, marketing and possibly premises and inventory. All this can put a strain on cash flow.
You might also be struggling with delegation. You can’t do it all by yourself and if you try to, you’ll stifle growth, slow down decision making and frustrate your team.
Understanding your financial position ensures you can fund growth sustainably and avoid overstretching your resources. It can also help you make decisions around training and developing your team, so you have the confidence to offload work to them.

7. Prepare for financing and investment

You may need some outside cash to help you grow. This often comes in the form of a loan or you might be thinking of some outside investment. Either way accurate financial data is non-negotiable. Lenders and investors want to see that you’re in control of your finances, with a clear plan for how they are going to get their money back.
If you don’t have regular financial reporting in place, getting additional financing can be a traumatic process. Not only are you trying to source the funds, but you will also be putting a financial reporting structure in place at the same time! If you have one in place, it all becomes so much easier as you will have the financial history and projections that funders demand.

8. Know how much tax you need to pay

Having up to date financials, allows you to get advance warning of your tax liabilities and prepare accordingly.
It also makes the preparation of your year end accounts easier. Failing to stay on top of your financials can lead to surprise tax bills that can derail your growth plans. With good financial reporting you’ll avoid surprises and stay on the right side of HMRC.

9. Make informed decisions

So many business decisions have a financial impact (if not all). Should you hire more staff? Invest in new equipment? Launch a new product/service? Move premises? Decisions like these are easier when you have reliable financial reports at your fingertips. Without them, you’re flying blind.

10. Spot and solve problems early

Your financials can be your “canary in the mine”. Early warning signs of trouble often show up in them – declining margins, increased debt, or late-paying customers. Having regular financial reports and understanding them can help you spot these issues before they escalate into bigger problems.

Partnering for Success

If you’ve got to this point you probably feel you need some help getting on top of your numbers – whether that’s support in helping you understand the parts you aren’t confident in, or helping put regular robust financial reporting in place.
Understanding your financials isn’t just about crunching numbers—it’s about empowering yourself to make decisions that lead to sustained success.
We can help, but will you take the next step?
Nothing ventured, nothing gained. We don’t bite!
Give us a call on 0131 220 0152 and let’s talk about how we can help.

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