The Four States of Knowledge: #4 Leads to Success

New companies often use fairly basic bookkeeping that entails shortcuts. However, to move to that next level, it’s essential to develop and maintain sound daily accounting practices; reliable accounting means profitable outcomes.

Once you’ve developed a solid accounting system, you need to understand how it works and how to use the financial statements it generates. Measuring the financial health of your business starts with knowing the status of your accounting records. And only when you understand this will you learn what problems and opportunities present themselves as you move towards becoming a successful and profitable enterprise.

Following are the four states of knowledge; while it may take time to achieve the final – and best – state, you should be focused on achieving it, because that way lies success.

The unaware entrepreneur

The most vital component of commercial success is quantification of achievements and the costs incurred in attaining them. A business owner who is unaware lacks information about what the operation has accomplished and the resources it has utilized. When the owner is not constantly aware of sales and costs, he or she can’t determine methods for producing a better result in more efficient and less costly ways.

Unaware entrepreneurs are simply reacting to surprises. Savvy business owners always know from their financial statements what actions were beneficial and which procedures require modification. Only through up-to-date records will he or she be able to make informed decisions.

The uncertain business owner

Business owners who are familiar with their financial statements are making progress, but still have a way to go. They know their greatest overhead expenses, gross revenue and approximately how much cash is in the bank account.

It’s what they don’t know that causes problems. Many are uncertain about marketing costs per customer, revenue per employee and profit margins on individual products or services. More importantly, the uncertain entrepreneur isn’t clear on how his or her situation compares to competitors’. The numbers are available, but are not assembled in a way that inform; every entrepreneur needs a system that helps identify trends and promotes educated decision-making.

The knowledgeable operator

A knowledgeable business owner has an intimate understanding of financial records. He or she has historical data and current figures for comparison. Ratios, charts and graphs help track progress and clarify the overall picture.

Knowing where the business stands at all times gives the knowledgeable entrepreneur the ability to accurately allocate all available resources – personal, personnel and equipment.

The savvy success

The savvy business operator knows exactly what to accomplish today to maximize profitability. With a budget to guide actions, he or she can compare actual results to projections, identify variances, and react.

Active financial management is strategic. By managing his or her financial affairs daily, our entrepreneur knows what the numbers mean and can quickly make informed decisions. The savvy success can anticipate outcomes of these decisions and make strategic moves quickly.

This entrepreneur can not only see the past and present, but also the future.

Change Happens: Be Prepared With a Dynamic Budget

If you’ve delayed implementing a business budget – or seldom update the one you have – here’s an important idea that will result in a more effective and useful budgeting process: Make it dynamic.

Instead of setting up a budget in January and never looking at it again, turn budgeting into an effective tool by making it more responsive to change.

Seasoned business owners know that conditions are constantly changing, and adjusting to those changes is the hallmark of sound management. Budgets are based upon assumptions. When you get a different result, you need to re-examine your projections.

As you know, the market is dynamic too. These days, things change quickly. For example, you can acquire new customers or existing customers can suddenly start spending less on your product or service. Checking and amending your budget regularly helps you identify and respond to changes in the business environment. A dynamic budget allows you to be prepared — to predict the impact, avoid panic and respond.

If sales change, use your budget to arrive at a new sales forecast. Determine what expense categories will change. Consider your capacity and scheduling. Decide if you need fewer, or additional staff. Adjust your marketing spending to attract new customers.

Revising your budget and incorporating new projections ensures you don’t run out of cash. This reduces stress and makes running a business much easier. Eventually, the budgeting process becomes a natural way of making managerial decisions.

Keep track of the ups and downs of today’s dynamic market with a dynamic budget.