So, what's the deal with the four crucial elements of a financial system?

Well, to get your business to stand strong financially, you've got to consider four key pieces of the puzzle: pricing, profit, performance, and planning.

Oct 19, 2023 - 15:12 Updated: Oct 19, 2023 - 15:16

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So, what's the deal with the four crucial elements of a financial system?

Well, to get your business to stand strong financially, you've got to consider four key pieces of the puzzle: pricing, profit, performance, and planning. You might hear them toss around the 4Ps at times.

Think about it when starting your own business; you'd surely want it to hit successville, right? Well, that's precisely why you've got to lay the sturdy groundwork for it first. These pillars serve as the bedrock for the growth of your venture. The same holds true for your financial framework too. It needs to be crafted on a reliable base. Otherwise, both you and your firm are likely to hit rocky waters.

Again, I'll emphasize that these four essential elements—pricing, profit, performance, and planning—often referred to as the 4Ps—play an integral role in strengthening the financial footing of any company. So keep on reading, folks, if you're eager to learn more about these building blocks.

Pricing is your first step towards a robust financial setup.

This one's super important, folks! That's why I focus heavily on it. Once you nail down your pricing, especially if you're running a service firm, everything else will start falling into place. By getting your prices right, you create an opportunity to increase your pay, earn more, and hire others to get things done for you. In plain English, this means you can scale up your business.

And let me clarify here: growing your business doesn't necessarily mean becoming a behemoth agency or hitting the seven-figure mark. It's more about understanding what you want and working accordingly. Maybe you have tiny tots to take care of and are happy working less to spend more quality time with them without sacrificing your income. Or perhaps navigating around a chronic health condition is part of your life. Either way, setting the right price can provide you with the financial buffer you need to lead your life the way you want to.

Profit is your second stepping stone to a healthy financial structure.

Well, your pricing impacts your revenue, but it's also essential to take stock of how much running your business actually costs you. Start by ensuring you're drawing a decent salary; once you ascertain that, check out all other outgoing expenses. Remember, folks, profit boils down to subtracting costs from revenue. If your incoming dollars exceed your expenses, voila! You're banking a profit. If not, then it's a red alert—you're hemorrhaging dough.

Here comes the' think and action' bit. Start contemplating your profit dynamics and how to manage them. For instance, what if you bring aboard a virtual assistant or shell out an extra X bucks every month? What kind of adjustments would be required? Would it mean hiking up your prices, getting more clients into your loop, or maybe even innovating a higher-value service?

Performance: The third linchpin behind a sound financial system

This pillar zeroes in on your business performance. You've got to get a firm grip on the key performance measures (KPIs) driving your business. Sure, all companies need some basic financial performance indicators like revenue, profit, ready cash availability, taxes due, and the like. But the specifics vary depending on the kind of business you run. For instance, if you're into marketing, it might be your marketing budget as a percentage of your overall earnings. It could indicate how hefty your piggy bank has grown or how much you've pocketed so far.

You should also get a handle on other measurable aspects of your business that matter to you. Like how much revenue flows in from email subscribers, the size of your clientele, or even your social media outreach. These tidbits can have a potentially big effect on your business.

Planning: The fourth and crucial step is upholding your financial structure.

Let's clear this upfront. Your accountant's understanding of your business standing isn't planning; it's more of a backward glance at your year-end finances. And don’t bank on them for forecasting or forward planning - that ball's in your court.

Let's say you plan on hiring a virtual assistant for certain weekly hours or an employee for some designated time. You need to figure out if you can foot the bill without breaking into a sweat at the thought of being unable to pay them if you lose a client.

Nifty planning lets you weigh various scenarios intelligently and plan accordingly. Maybe you conclude that you can still foot the bill for this new hire unless your earnings drop by a certain margin. Or you anticipate an X amount of VAT down the line, so you set aside 19% for corporation tax purposes or maybe 30% for single-trader accounts. The whole idea is to forecast what's likely to happen in your business and figure out how to take it from where it is today to where you envision it to be.

If setting up a sound financial basis for your company is your goal, these four crucial pillars must be in place. They'll not only drive growth but also ensure stability, so you can make informed decisions. Ultimately, they're here to help your business flourish.

If the pricing bit has got you feeling stuck and you don't know what your minimum charge should be while earning a decent income, my price calculator tool could come in handy.

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