Understanding Your Financial Position

Whether managing your or your company’s finances, understanding your financial position is the key to success and it’s simpler than you think. Whether you’re a small business owner or just trying to better manage your personal budget, tracking and assessing your spending is essential for staying on top of everything but it’s often overlooked. If you ever find yourself in a position where you’re losing track of expenses, your invoices don’t match or you’ve missed a payment, I’d strongly encourage you to take a step back and re-evaluate the immediate priorities. Once the dust has settled you’ll be in a better position to put robust measures in place to help you with day-to-day money management, moving forward.

How to Track Your Spending

Tracking and assessing your spending might seem like an overwhelming task to some – especially if you’re not used to keeping tabs on where your money goes.  It can be a real shock to the system when you find yourself in a position where you have to start doing this suddenly, such as when starting a business. There’s a lot to keep track of – but the good news is that it doesn’t have to be complicated or time-consuming, that’s the thing. I completely understand if your immediate reaction to money management issues is to take on an accountant to straighten things out for you. Although taking on an accountant could potentially be an easy hands-off approach to a solution, it’s not always an accessible approach, especially when many businesses now operate on higher costs, lower margins and growing inflation.  

Trust me when I say: having a good understanding of financial management can give you the confidence to make sound decisions with your money. Allowing you to plan for the future and make sure that your money’s working for you, as it should. With a clear understanding of your financial position, you can save time and energy, and avoid potentially costly mistakes and missed opportunities. Having control over your finances is incredibly empowering and you’ll find that this can help to boost confidence in yourself and your business. 

Ways to Control Spending

It can be useful to think of cash as a ‘tool’ rather than as liquidity. Think about this: To insert screws into a board you’d use a screwdriver, to add nails you’d use a hammer. But what is all this talk about DIY and how does it relate to money management? Well, when you need to do a job at home, you generally use a tool to do it, but if you start hammering in screws and screwing in nails you’re going to give yourself a hard time. It’s not just about using the tool but knowing HOW to use it. Once you know how to use your ‘tools’ effectively; you’ll realize how they can be used to improve your business, or better yet: your quality of life. Let me explain: 

1. Bring it back to basics: It might seem obvious but it’s often overlooked. One of the best ways to track and assess expenses is by creating a budget. A budget will help you identify exactly how much money you have coming in each month, as well as how much you need to cover all of the expenses: rent, bills and other costs associated with running a business (or living life!) should all be included. But think about it: If you can see at a glance what’s coming in and what needs to go out, you can use the data to help you: cut back costs, priorities and track your spending, among other things. The more you think about it the more useful it becomes. Use a spreadsheet to lay this out and automate calculations to eliminate human error where possible, if you don’t have a license for software some good online alternatives can be used for free.  
2. Use a mobile app or software: There are plenty of great apps out there that make tracking and assessing spending easy. QuickBooks and Xero are two well-known examples of software that can be used to gain a deeper understanding of finances. Many people and businesses already benefit from the ledger and accounting solutions. Over time more people have come to adopt the software, encouraging developers to create more apps and software. Thankfully for you, this means you’re spoilt for choice when choosing the right app or software for you. Many suppliers offer free trials or free entry-level access to their platforms. 
3. Use a cash flow forecast: You can add more detail to your budget by supplementing it with a cash flow forecast. Lay your income and costs out across a year and break this down by month, this works for both personal budgets and businesses. You’ll find that you can forecast most shortfalls before they occur. The easiest way to do this is to use accounting software but you can achieve the same output through Excel or Google Sheets. If you do use a spreadsheet, use formulas to auto-calculate values for you, it’ll save you a huge amount of time, effort and errors. Make this a ‘live’ document and regularly update it to incorporate changes in revenue and expenses so that you always have an accurate summary of the business and personal finances. The forecast can also be used to seek future investment, which will be subject to satisfactory profit, loss and cash flow forecasts. 
4. Monitor regular expenses: Big ticket items such as manufacturing, rent, car and mortgage payments are all important to track. But there are additional areas of focus to gain a better understanding of where the money is going each month. Think lunches out, coffee runs, train tickets and Ubers. It’s important to pay attention to even minor expenses, they quickly add up over time if they’re not watched and managed. If possible, set up a system for tracking all costs so that it’s easier to monitor spending in real time, some commercial banks provide this and some apps can be integrated into your account’s API that’ll enable you to auto-track expenses to predetermined criteria. 
5. Separate business from personal: By separating your business and personal finances, you’ll be better placed to track expenses, income, and profits, it’ll also make it easier to identify areas where you can save some money and could help to minimize personal liability for business non-compliance. It’s worth noting that this is subject to local corporation laws and that separating business from personal finance doesn’t by default minimize personal liability in and of itself. 
6. Set financial goals: Setting financial goals is an incredibly useful tool and it can be used to inform, provide structure, influence decision making and motivate. When setting goals, consider your desired income level, desired saving rate, desired rate of return, and desired debt-to-income ratio, and implement strategies to achieve the desired output. 
7. Draw up and implement a finance strategy: Develop a financial strategy to get the most out of your business finances. The strategy can include your budgeting system, ways to reduce expenses now and in the future, ways to increase revenue, and ways to manage debt. Your strategy should also include steps to ensure that you’re meeting your financial goals through KPIs and that you’re staying within budget.
8. Review once per quarter: A regular review is essential. At least once a quarter is a good rule of thumb to ensure that all your financial information is up-to-date and accurate. Take your time and be thorough. Identify opportunities to save through reducing, eliminating or consolidating services and expenses. All income and expense sources should be considered so that you can see the full picture. Investments, savings and dividends should count towards your income and ensure you’re anticipating your sundry items. Start with your financial statements: your budget, cash flow forecast, balance sheets and bank account statements can all be used to gain a better understanding of the company’s current and future financial position. 

Once you’ve determined the most suitable methods for you, determine the level of complexity you need. To do this: consider your desired output. What do you need? Higher margins? lower income to debt ratio? If you want to raise your margins it might be worth conducting a cost analysis as part of your budgeting. If you want to lower your debt-to-income ratio, you can analyze your current debtor payment schedules for opportunities to pay down debt faster.  

To simplify a method you could, for example, create a cash flow forecast but do this to the first quarter of a given period, rather than provide an annual projection. In relation to software and mobile apps, there are also varying levels of complexity depending on your individual needs and the needs of your business. Budgets, cash flow forecasts and financial goals can all be created with software and typically simplify the process, especially in the case of cash flow forecast creation and other financial projections. 

Overall, adopting any of the above will be a positive step towards understanding your financial position and will empower you to better track and assess your spending when implemented effectively.