Guest Blog: The power of understanding your numbers

By: Alex Von Schirmeister

MD, Xero UK & Emerging Markets

Being an entrepreneur or a small business owner or even a sole trader is one of the most noble activities there can be. It takes courage and vision, and resilience, and graft and very hard work to set out and run your own business. It also means that you oftentimes do everything yourself. You sales and your marketing and your social media, and your purchasing, etc. And… you do your numbers.

It’s often not a lack of profit margin or lack of growth that kills small businesses, but cash flow. Without understanding what is in the bank, revenue and outgoings in real-time can leave business owners blind. Knowing your numbers inside out can prevent potential problems for those who think they are in a stronger financial position than they are.

And the impact isn’t limited to the business balance sheet. Poor cash flow management can have a damning effect on entrepreneurs’ personal lives, given the interdependence of personal and company finances for so many. For instance, Xero’s research found 82% of owners are affected by stress, 80% by anxiety, and 60% have trouble sleeping due to financial concerns. 

However, there are practical steps to alleviate cash flow pressures, which start with proper planning and end with using financial visibility to make proactive, positive changes to business operations. 

Keep one eye on the future

Ambition and enthusiasm are important characteristics of business owners. It’s a big part of why they started a new venture in the first place. But those traits must be grounded in the facts. While the feeling of control when starting a new business can be exhilarating, the pressure is on to make the right financial decisions. Some of those decisions will be good. Others won’t.

This is why it is so important to plan ahead. Understanding and measuring cash flow provides a more accurate depiction of normal business activities and the level of profitability attached to them. And what about if this is done in real-time? Using technology to forecast cash flow can identify crunch points throughout the year and help business owners adapt when things like overheads of interest rates change, ensuring you always have enough cash to keep things going. Likewise, using valuation methods like discounted cash flow can help decide which direction to take based on projected returns.

Of course, different plans work for different businesses. I always strongly recommend working with an accountant, who can help owners and operators discover which route will yield the best results, as well as navigate the ever-changing fiscal landscape.

Good financial habits

Collecting the most up to date financial data is vital. With smaller margins at the whim of a fast-moving macroeconomic environment, access to real-time information can embed good financial habits like keeping track of money owed to suppliers and which customers are late to pay. Likewise, generating instant invoices and ‘pay now’ buttons make bringing in revenue much faster, and as easy as clicking a button.

Turning on your bank feeds to allow you accounting software and your bank to effectively talk to each other, makes reconciliation much easier, making sure you know what money has been paid.

Once you’ve established these habits and established access to the right information, that strong accountant partnership can help interrogate that data further and establish areas for improvement.  

Turn information into action

With this foundation in place, the right adjustments become clearer. For example, if there are specific points of the year where cash flow is under pressure, business owners could react by negotiating different payment dates with suppliers to better align inflows with outflows. Alternatively, experiment with reducing invoicing payment terms by a day or two to encourage customers to pay faster.

By understanding financial health, it’s also easier to see the monetary cost of payments in and out of the business. For example, regularly paying bills late could incur significant interest, with a negative impact on your credit score. Likewise, it’s worth analysing the benefits of each payment option you offer. While convenience incentivises customers pay, charges for receiving those payments can quickly eat into profit margin. 

Finally, pricing products and services has never been more difficult, considering the cost-of-living alongside balancing the books. Consider experimenting with different prices for a week or two, while keeping a track of income and stock levels, to find the sweet spot for generating maximum profit. 

Take off the blindfold

Even business owners with the most thorough understanding of finances can fall foul of the fast-moving economic context without real-time data to lean on. It’s akin to voluntarily wearing a blindfold, exposing a business to unnecessary risks and challenges. But having the right information at your fingertips makes all the difference. Knowing your numbers comes down to turning financial management from time-consuming admin into a powerful tool for informing proactive, profit generating changes and building resilience.

Alex Von Schirmeister

Managing Director, Xero

UK & Emerging Markets