To anyone not directly involved in finance, even the most basic financial management concepts can evoke a feeling of panic!
However, when you decide to start a consulting business, you will need to keep a close eye, and a hand, on your business’s finances, if you expect any measure of long-term success.
Simply put, even if you hire outsourced professionals to maintain your books, it remains your responsibility, as a business owner, to have a handle on your finances!
Here are a few concepts, simplified, that should help you to understand and manage your consulting business’s finances:
Income sometimes also referred to as gross income, turnover, or revenue, is the total amount of sales made, before any deductions are factored in.
Keeping track of this is a simple matter of keeping record of your sales. Simple. Moreover, by preparing and keeping record of invoices, it is a simple matter to calculate your sales. Some companies, particularly those engaged in long term contracts, issue a proforma invoice at the start of a project, in order to get the income “on the books.” A final invoice is then submitted at the end of the project.
Expenses are almost as simple as income. Basically, your consulting business has two kinds of expenses – direct expenses (salaries or payments to contractors) and indirect expenses – your overheads or running costs.
This is what we are all in business for – profits. Breaking even is a milestone, but for a business to grow, it needs to make a profit.
The simplest form of calculation would be sales less direct expenses. This figure is known as gross profit. To calculate your business’s nett profit, you need to deduct your indirect expenses from the resulting figure.
Finally, to calculate the actual profit your business is making, you need to deduct income tax from this last figure.
If you have an amount left, you have made a profit. Also fairly straightforward when you think about it!
Assets and liabilities
Assets of a business are divided into two categories: so called liquid, or short-term assets, and long-term assets. Generally, short-term assets are your bank balance (the cash you have on hand) and accounts receivable, or the money your clients still owe you.
Long-term assets are purchases, such as buildings, vehicles or equipment, that are the property of the business, and that are retained for a long time. Note that assets are subject to what is known as “depreciation” meaning that they decrease in value over time. This decrease should be factored into your running costs, or indirect expenses.
Liabilities, on the other hand, are any amounts of money that your business owes, either short or long term. Vehicle and asset finance falls under this category, as do loans, credit agreements with supplier’s etcetera.
Capital is the money that you put into, or need to put into, your consulting business in order to start, and run in.
The last concept, and probably the most critical, is cash flow. This is the in and out flow of money in your business, and keeping a tight grip on this is probably the most important thing you will do for your business!
Consider this: your business is set to make a $ 5 000 profit, on paper. However, your suppliers require 30-day payment, and your client only pays you after 60 days. Essentially, if you owe your suppliers $ 2 000, you will need to carry this expense for a full 30 days after it becomes due, before you recoup it – something few new businesses can afford to do!
So keep a firm grip on cash flow, as well as making sure you understand and monitor your consulting firm’s financial status, and you should be fine. Ignore it, and you could be in trouble!