A common challenge faced by a significant portion of our clientele, irrespective of their financial prosperity, revolves around establishing and sustaining an effective, transparent system for managing their finances. Apart from the exorbitant current cost of living, which can itself be disheartening, time constraints pose a significant hurdle for most of these days! Even our most accomplished clients, who have successfully expanded their businesses and achieved financial success, often find financial management to be tedious. Quite often, even for those fortunate few, the thought of “I need to create a plan/take control of this/hire a financial planner,” while acknowledged, unfortunately, tends to become a concern postponed to tomorrow.
Taking control of your personal finances
“I need to get onto that” “ I need to stop ordering takeaway” “When I get a bit more time I’ll sit down and map out a budget” Sound familiar? You’re definitely not alone.
So, how do you dive in quickly and stop burying your head in the sand so to speak?
Firstly, you need a quick and easy way to track exactly what you have coming in and going out. Most of us don’t have the time to sit down and track it manually, as much as we may intend on doing so at some point. Here’s my biggest tip: Track it automatically! There are tonnes of apps now on the market to help you do just that, but my favourite – if you have the budget – Xero! Yes, using Xero is a more expensive option than many apps on the market (which are all fantastic by the way), but for me, especially being an accountant myself – jumping into my personal file and my business file to check how things are running on a daily basis really isn’t a problem- and Xero is of course second nature to me anyway.
Regardless of the option you go with – here’s what you want to aim to have set up:
- All your personal bank accounts (including PayPal) -MUST feed into the software of your choice.
- If you run a business you MUST be OCD about splitting your spending between allocated personal and business bank accounts. If you prefer to pay for things by credit card (which means that you have 1 credit card with a bunch of personal and business transactions at any given time) – try – in whatever way you can to stop this. Not only does this practice make your business bookkeeping more time-consuming as you need to park anything personal into a personal account in your books; but it also makes it much more tedious to track things. Can you get a second credit card? If not an option, can you try to pay for as many business things as possible with your business bank account, meaning that very few business things hit your personal card? Or, vice-versa – can you run a business card and minimise what personal costs you put on this, paying for these out of your personal bank account? If you run your business as a company structure, having only 1 credit card to cover business and personal costs and be even further complicated to due to division 7A laws potentially being triggered (which I won’t get into here).
- Limit paying for things in cash – at least while you’re tracking your spending. The point of my logic here is that ultimately, you want to create a simple, automated way of tracking your spending that doesn’t require you to manually enter data anywhere.
- If you run a business, NEVER combine a personal spending tracking system with your business bookkeeping, this just becomes messy and complicated – and could ultimately cost you in bookkeeping fees.
- Pick a date – ideally the first of the month – to get your personal finance system setup. From this date onwards, you’ll be able to categorise your income and expenses within your personal finance tracking software in order to ultimately produce yourself meaningful reports that can help you see if you really are profitable personally, and where you’re spending too much. Basically – you’re looking at your personal financial situation – just like you would a business. If you’re really keen, you can even add your assets into a personal balance sheet. E.g.: vehicles (if not owned by your business), your home, any personal loans, shares, the balance of your superannuation etc.
- Whatever you have left at the end of the day / week / month is your surplus, and what you should be depositing into your personal savings.
Running your personal finances in this manner, essentially treating your personal situation like a business within itself – is not only a fast way to obtain a snapshot of where you’re at, and where you’re heading if you continue on the same trajectory; but it’s also satisfying. James Clear in his bestseller, “Atomic Habits” actually stresses the importance of graphs and visual aids in helping you to view your progress towards any goal you might have – this method is a perfect example. Ultimately viewing your situation within a financial statement – comparing with prior periods will serve as a huge motivator within itself. Before long, you’ll find yourself thinking twice before ordering takeaway or purchasing that new handbag due to your newfound dedication to reaching your goals on your personal P&L!
Taking control of your business finances
If you own a business, you’ll likely have heard before that roughly 30% is the ideal maximum figure to target for your total cost of goods or services sold. Any higher than this ultimately means you have less remaining to cover your fixed costs and of course, make a profit. Yes, you can always scale up to obtain the net profit you desire however when it costs a lot to produce your product, the odds are that when you increase the demand to produce more of it – your fixed costs may no longer become fixed, and may increase to handle significant demand; and you may suddenly find yourself stressed and very time-poor. Ultimately, before you grow, try your hardest keep you COGS (cost of goods sold) as a % of your revenue as low as possible without compromising the quality of your good or service.
How do you reduce your COGS?
- Raise your prices
- Expand your service offering to include additional goods / services that don’t cost you much extra to produce since you have all the mechanisms in place to provide anyway
- If you produce a good – negotiate deals / purchase in bulk / consider other suppliers
- If you provide a service and you engage contractors – hire more contractors at a lower rate and over time direct more work to your cheaper contractors (don’t do it suddenly)
Other key considerations
You’ve lowered your COGS as much as possible, you have no further room to move at this time – what next?
Other than monitoring / reigning in your personal spending (see above), the next step is to look at your business subscriptions. Can any be reduced / ditched for now? It’s important to look at what subscriptions aren’t totally necessary and which are really an asset in terms of the potential future revenue they will bring to your business. If there is a simple & fast way that you can sort something without that subscription – go for that. If the subscription saves you significant time – of course- keep it! If your subscription is a key means to bring revenue into your business, and if it will pay for itself in due course – then (again) – keep it.
It’s all very well to run a business with decent turnover, and even few fixed costs; however if your cost of goods sold is high – ultimately, it could be difficult to scale up.
Need help tracking your finances? If you run a business, the absolute best place to start is to sign up for our affordable Virtual CFO service. For more information, don’t hesitate to get in touch with our team – we’d love to help you get across it all!
