Corporate Personhood is the idea that corporations are like people—at least when it comes to certain rights and entitlements. This might explain why some corporations, like people, choose to ‘go on a diet’ in their case, a diet of finances! Poor financial management is a source of much heartache (and heartburn!) for businesses, particularly small businesses.
Often it isn’t a lack of revenue or a weak profit stream that’s to blame—just poor regulatory mechanisms and next-to-no financial planning. It’s not whether you have money coming in, but how you manage company finances that matters.
Knowledge is power, and financial knowledge increases your control over your finances. Financial literacy as it’s also called is a critical tool in any small business owner’s toolbox. As we’re often reminded, it’s our responsibility to familiarise ourselves with the Law, so that we don’t break any laws. Similarly, understanding the laws of cause and effect from a financial perspective, as they apply to your business, is invaluable.
What does this involve? Well, for one thing, it means getting comfortable with your company’s financial statements. After all, if you don’t know what you’re supposed to be regulating—how are you going to regulate it? Your business’s financial statement consists of three key elements: a profit and loss statement, a cash flow statement, and a balance sheet.
The first gives you a snapshot of your revenue and expenses, the second the net growth or fall in cash, and the final document a look at your assets and liabilities. Each of these elements functions as a barometer of your fiscal state and how stable or volatile it is.
Reduce and capitalise on your remaining assets
Where possible, scale back your assets. Assets are of course linked to sales and revenue, but they can also be expensive to maintain. Your assets dictate the amount of capital you need to raise, and capital for its part isn’t cheap.
If you do it strategically, you should be able to reduce your assets and successfully capitalise on the assets you do have in order to leave your revenues unscathed. This is something of a tightrope walk, but is not impossible to accomplish.
Budget, budget, budget
If it wasn’t already clear, the importance of budgeting can’t be stressed enough. In conjunction with an understanding your financial statement, a well-planned budget helps ready you for many eventualities. It allows you to be flexible in how you respond to sudden, unplanned, expenditures for example. It allows trains you to think realistically in terms of short-term, mid-term, and long-term goals. This budget should include an estimate of future sales prices and volumes, as well as cost.
With a budget,your accountant will be able to come up with a projected profit and loss statement. This will help you measure your performance in the coming year, to see how you’re faring, and to determine if you need to change direction mid-stream.