Business mentor: Planning makes money go round

Q. Help, I have never run a business before. How can I use my financial data to manage my business better?

A. Heather Douglas, from Home Business New Zealand, replies:

New businesses are often happy to be chalking up sales and can't understand why they never have any money available!

It's important to understand the difference between turnover (how much money comes into the business), profit (how much is left over after all the bills are paid) and cashflow (how much money you actually have in hand to pay your expenses as they arise).

Many a business owner has found after analysing the relationships between these that an activity which contributes proportionally more to turnover is not as profitable as one which on the face of it appears less financially rewarding, or that signing up lots of sales contracts with long payment deadlines may seem worth while in the long term but leaves the business unable to pay creditors in the interim.

Every business should use financial data gathered during previous business years to plan for the next. If the business is highly seasonal, or there are large expenses (including tax) falling due at one particular time, these must be considered.

Forward planning for home businesses should include at least a cash flow projection and budgets for both income and expenses. They not only form the backbone of good financial planning, but having sales targets can be a worthwhile motivator, and budgeting for marketing, training or equipment enhances the professionalism of the business.

Analysis of your financial data is useful in assessing whether the business is helping you to achieve your goals and how well you are doing compared with previous years, your expectations or similar businesses.

There are a variety of useful ratios which can be used to interpret the financial health of your business, whether it is providing a worthwhile return on the investment of your capital and time, and so on. These are beyond the scope of this article, but your accountant - or even a good business book - will be able to help you work these out.

* Heather Douglas is the managing director of Home Business New Zealand, which publishes the HomebizBuzz website.

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