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18 Oct 2023

Manage your business with financial figures and plans – a financial plan is one of the most important tools for an entrepreneur

Analysing the financial statements and keeping an eye on the profit and loss account are important, but it is even more important to drive your business towards the future – to plan and to anticipate. 

A financial plan is a great tool for planning the future of your business, calculating profitability and pricing your products and services. A financial plan also tells you where the money is coming from, where it is going and how much.

1. Start your planning by making use of old data 

You can make use of data that you already have to plan your finances. Your most recent financial statements and their analysis provide a good basis for your financial plan. The more detailed the data that you use, the more accurate your plans will be. You should not make plans based on your gut feeling, but use actual figures. 

The data in your latest financial statements can provide a basis for both your profitability calculation and your budgeting. 

2. How profitable is your business? 

Profitability measures the company’s ability to make a profit. If the company has more income than expenses, the business is profitable. However, the bottom line of your financial statement only provides a general idea of profitability, which is why you should examine your profitability in as much detail as possible.

It is certainly useful and also interesting to know how the income and expenses of your company are divided between different services or products. Before you can calculate these, you need to define various monitoring points.

Start using dimensions, or management accounting tools. They allow you to keep track of monitoring targets that are relevant for your company or the productivity of individual people or projects. 

Dimensioning also allows you to compare and assess the profitability of different services, products, projects and individuals. You may be surprised to learn, for example, that the service that consumes the most resources in terms of time is not your most productive service after all. Or that your highest-selling product has the lowest margin. Or that certain products and services are definitely worth focusing on. 

Exact figures and their analysis allow you to make changes and drive the company’s operational planning towards higher productivity. 

3. How do you set the right price for your products and services? 

Profitability calculation can also be a fine-tuning tool where buyer psychology plays a role. That is why the calculation should always factor in the profitability of individual products and the profitability of the business as a whole. 

Sometimes you may want to sell a product or a service at a lower or no margin at all in order to sell something else at a high margin.

Price sensitivity refers to the customer's price awareness and their desire to buy a product even if the price changes. Raising the price of a product too much can lead to a major decrease in sales. On the other hand, even a small discount can increase sales significantly. 

It is useful to do various calculations on what would happen to the prices and profitability if you, say, increase the selling price by five per cent. Or how many more products or services would you need to sell to reach the target margin and result? Or what would be the impact of a price discount on your profitability and result? 

4. Budgeting improves cost awareness and clarifies your performance targets

A budget is a versatile management tool. It clarifies your vision for the future of the company and also shows you what achieving your goals would mean from a financial perspective. 

For example, if the workload in your company varies by season, and you do not pay a fixed sum every month as salary, you can use budgeting to see if you have allocated enough resources and money for salaries. 

If you spend more on salaries than you budgeted for, you can plan the work better in the future or take a closer look at the reasons for the excess costs.

A budget improves cost awareness significantly – it makes it easy to understand how much money you spend and on what. On the other hand, it also gives you a clearer idea of how much you need to sell to accomplish your goals and keep up the good performance of the company. 

Start planning together with the experts at Keuke.

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