Business Finance - 3 Golden Rules
Looking at the ‘Brain’ Centre of the business, or the Financial Management, there are a few golden rules or common sense practices that are worth mentioning.
1. Income > Expenses.
The first Golden Rule of business is to earn more than you spend!
Some business people lose sight of this. I have even had business partners who didn’t understand this concept! When you price a product to sell, make sure you have covered all your expenses and outgoings in your calculation; and don’t forget to add a profit margin!
It is very important to have a good accounting/bookkeeping system to track income, expenses, profitability of each key areas of the business, creditors and debtors, tax obligations and your balance sheet. Then monitor it monthly, weekly or daily. I prefer daily!
2. Build RIO into Prices.
The second golden rule is not so common. I like to see it as paying the shareholders first. In money talk, you can refer to it as Return On Investment (ROI). In practice, it means building into your pricing/costing calculation, the amount that you want to give the shareholders as a return on the money or effort they have invested in the business. Again, many business people ignore this, and instead, simply pay themselves a salary for their work effort. I suggest that both should be included in prices.
3. Don’t be a bank!
The third golden rule is to avoid providing credit to customers. Don’t become a ‘bank’ for your customers by extending credit to them. Make customers pay upon purchase or delivery. Alternatively, offer an outsourced factoring option to them. That’s a finance company that pays you the amount on the invoice and then arranges payment terms with the customer. The customer then owes the money to the finance company, not your business. I found that offering such an option with a 15% up-front loading on the price, plus 3% per month on the outstanding balance, encouraged customers to pay at the time of purchase. Furthermore, by outsourcing the finance, it disassociates the process from your business and eliminates any tension that your pay-on-purchase terms might cause. Of course, there are many financing options available to customers these days so they don’t need credit from you.