Oftentimes, even if a company has a financial system, it sometimes does not work. Most of the time it is due to a lack of understanding on the part of the management of why they are necessary and what tasks they have to perform. This results in incompetent financiers being assigned to the company without the manager being able to set adequate targets. In addition, there are other errors that lead to financial problems and in this article, we share them with you.
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Inadequate money management
The employer usually believes that the money of the company is his. This mistake is especially common in small businesses. This is the wrong approach because the business exists under the laws of the market and you cannot get any amount out of it without losing business. In some cases, the money in a company account does not even belong to you yet, if it is an advance for some project. Until the work is done and the works are closed, that amount is the counterpart money you have in your account.
There is another nuance that is a lack of understanding of how much company money should be put into circulation, how much can be set aside to cover a possible cash gap, and how much can be borrowed for personal needs without detriment to the company. To avoid these issues, you have to correctly calculate profits, plan for expenses and development in the future, and only receive dividends after the company is fully insured.
Miscalculation of profit
If a business calculates a profit from cash on hand, or if it subtracts an expense from revenue and treats the amount as profit, it is not doing so correctly. The difference between income and expenses is the accounting profit. To achieve a financial benefit, additional costs must be subtracted from the accounting profit: uncompensated own costs that are not included in the cost of production lost profits and business risks. In addition, it is necessary to take into account the return on the investment and the possible cancellation of part of the benefit due to economic deterioration.
The problem with an incorrect calculation is that the entrepreneur draws conclusions about the company’s performance and makes development plans based on it. Consequently, the employer can end up with a plan that does not work and with an unjustifiably optimistic view of the situation of the company.
Planning and thinking about the execution mechanisms of the plan is one of the bases of the management of a company. In order for the plan to be executed to the maximum extent possible, at least by 80-90%, it is necessary to write a competent financial model with various scenarios, calculate the budget, establish the deadlines and the people responsible for the execution of the projects. activities, and constantly monitor their implementation.
Misconceptions about the direct link between sales and profits
In principle, the relationship between the two is very simple: a greater number of sales translates into more income. But entrepreneurs often lose sight of the fact that overhead costs increase with sales. You have to hire new staff, spend more on the purchase of raw materials and merchandise, on logistics and organizing storage.
Consequently, instead of a profit, a loss can be made if the entrepreneur does not calculate in advance how income will increase, what additional expenses will arise, how this will affect the company’s turnover, and if he has enough money for it. It is possible that increased sales will cause such an increase in costs that the company is no longer profitable.
Where to start with financial accounting
- The financial accounting will facilitate the management of your company Based on numbers and not on assumptions. You can start with a cash flow statement. This report shows where the money is being spent, how much is left at the beginning of the month, and whether the business has enough money for running expenses. For this you do not need to buy special programs; at first it is enough to make a table in Excel. Break down income and expense items by category to make it easier to find transactions by month.
- If you have a small business, separate your personal finances from those of the company. You could set your own salary to get a clear idea of how much the company can count on and how much you can spend on your own needs.
- Get in the habit of counting your profits correctly, don’t limit yourself to one accounting method. By taking into account all costs where possible, including hidden and potential costs, you can build more reliable financial models and consequently invest money more wisely and draw up a development plan for the company.
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