Daily management

17 November 2017

3 signs your company’s financially fit

As an entrepreneur you need to be able to react quickly, as you’re no doubt aware. Both a condition for and (hopefully) a consequence of that is that you’re in good financial shape. When exactly can you say that you’re in a financially sound situation? Here are a few signs for you.

1. You break even (or even better: make a profit)

Obviously, when you start your company you’ll have to incur a number of costs. The key thing then is to ensure that your earnings equal these costs as soon as possible. Easier said than done? A financial plan can help you. Draw up a profit strategy so that you know exactly where you are with your earnings.

It’s not sustainable to keep making a loss. It’s in your interests to reach a break-even point as quickly as you can. This is a situation where you don’t make a profit or loss. Your earnings and expenses balance each other out. The next milestone is to increase your earnings even more so that you make a profit.

Is your business already turning a profit? Great! In that case, just watch out if you suddenly find yourself back at break-even. Try to identify the reason for this and adjust your financial plan accordingly if necessary. It may be that your profit strategy isn’t feasible and you need to revise it.

2. Your cash flow is stable

Money flows into your business and obviously you also give it out. The difference between your company’s earnings and expenses over a specific period (such as a month or year) is called the cash flow. You need to keep a close eye on this because it’s one of the most important financial criteria.

Prepare a cash flow forecast for yourself: note down the days of the month when money flows into and out of your company. That way there’ll be no unpleasant surprises. Because a negative cash flow means that you don’t have enough money in your pocket to invest or fund a major expense. Let alone to simply fulfil your commitments.

With a negative cash flow, you’ll have to borrow money, which in turn will cost more money. You’ll run the risk of ending up in a downward spiral. So, ideally, keep your cash flow positive and as stable as possible. This also means that it might be better for you to look at a loan for a major investment rather than pay for everything out of pocket and upset your cash flow.

3. You budget regularly

As an entrepreneur you need to have a clear idea of your financial situation. Which invoices have yet to be paid, what investments you have your sights on, how much VAT you’ll have to pay… Three key pillars here are revenues, costs and investments. But also: do you need extra capital – to allow you to make a necessary investment, say?

You need to outline in your budget how you’re picturing and planning all that. And even more importantly: you must test this against reality continuously. This is where things often go wrong. Because you don’t have a crystal ball, you can’t predict everything. So, it’s always wise to set funds aside for a rainy day. That way you’re always armed against unforeseen costs.