The starting point for the ensuring the profitability of a business is knowing the finances of the company thoroughly. Entrepreneurs must know their cash flows and related fixed and variable costs in order to grow the business sensibly with due consideration to the relevant risks. When the aim of a business is to generate profit, the company’s key people need to understand how this can be done from the very start. How can this type of understanding be developed?
For this publication, we interviewed Pasi Teräväinen from Jamk University of Applied Sciences. Pasi is a coach for the Startup Factory’s Idea to Business course and Business Coaching services. He has 24 years of experience in providing consultation on start-up business activities. He is also in a board member of three separate companies and works at Jamk’s Institute of Rehabilitation with business communities and partnerships.
Why do profitability and cash flow calculations need to be made right when the company is established?
From the start, an entrepreneur must have a vision and idea of the eventual profitability to be able to make the right choices along the way. If no calculations have been made or they are too optimistic and the situation begins to look concerning, making a sudden change in course may be a challenge. For example, it may be difficult to cut fixed costs on short notice and increasing prices does not automatically make the situation better since the competition often determine the price level. In order to avoid these kinds of unfortunate experiences, profitability and cash flow calculations should be prepared immediately and as realistically as possible.
“An entrepreneur must acknowledge the power competitors from the start, along with the company’s risks and opportunities. When you know that the foundation of the company’s finances is sound and the calculations are realistic, it is much easier to have confidence in the activities. Within the framework of the plan, this enables the entrepreneur to focus fairly freely on things such as sales and marketing, brand building and product development,” Teräväinen says in summary.
The Startup Factory’s Idea to Business coaching course delves deep into the profitability of a business. Participants get to prepare financial calculations for their own concrete business idea together with a coach, which does wonders to reduce the worries related to starting and developing business operations.
Knowing the company’s finances enables building sustainable profitability
Many entrepreneurs are somewhat sloppy with regard to profitability and cash flow calculations and prefer to focus their time on things that clearly generate earnings. It is a common belief that as long as new customers are gained and invoices are sent out, the entrepreneur is happy and sleeps better at night.
Sales and marketing are often seen as key factors for the profitability of a business. Profitability and cash flow calculations are regarded as secondary necessities that can be handled on the side. In reality, the situation is completely the opposite. If the finances, or in other words the pillars supporting the company, are not in order and there is a lack of understanding about their importance, sales and marketing may increase the company’s costs and losses, bringing the entire operation to a halt very quick and turning a marathon into a 60 metre sprint.
Every entrepreneur surely understands that it is very difficult to keep yourself and your employees afloat through sporadic sprints. In these situations, a good night’s sleep is most likely nothing more than a distant dream. When the entrepreneur has enough knowledge about finances, there is much less need for worry and achieving business growth is substantially easier.
Ensuring that financial administration and calculations are in order and people can trust them removes the need to start the calculations regarding capabilities and profitability impacts from scratch in the contest of every investment or recruitment process. In the worst case scenario, the entrepreneur can be an obstacle to profitable growth of the operations,” Teräväinen explains.
Take the reins of your company and fix profitability and cash flow calculations
Even though it is important to manage and be aware of the company’s finances from the very start of the business activities, investing these aspects is not too late as long the operations are still rolling forward. Entrepreneurs who are not very knowledgeable about these areas, can prepare a situation assessment or unofficial interim financial statements with their accounting firm, for example.
“Help can also be gained from private consultants through ELY Centres and the Startup Factory’s From an Idea into a Business coaching course that helps to identify your idea’s business potential and to develop the idea towards setting up a business. At the same time, our team of coaches will help you understand business and its potential and demands. During the course, we can spar the business ideas and, of course, look deeper into financial management through various calculations,” Teräväinen says in summary.
Any students, researchers and staff members of Jamk University of Applied Sciences, University of Jyväskylä and the GRADIA Jyväskylä Educational Consortium who have an idea are eligible to apply for the coaching. Coaching is also available through the Open Studies of Jamk and the university
“There is no need to build any kind of panic or fear around profitability and cash flow or push further time and time again. You do not need to wrestle with them alone, Teräväinen explains.