You Must Understand What The Numbers Say About Your Business
When you engage Small Business Owners in a conversation about the challenges they face in managing their business, they will mention one area of weakness they hate to deal with: Financial Management.
Managing finances is the area of the business that deals with handling of cash, bookkeeping, accounting and raising capital. Unfortunately, while most Small Business Owners admit that they are comfortable with the day-to-day operation of their businesses, like producing, marketing and selling their products and services, they are also the first to confess that they do not feel comfortable when dealing with the money side of their companies.
What is responsible for this discomfort among Small Business Owners? Can they afford to ignore this discomfort, without impairing their effectiveness as entrepreneurs?
Small Business Owners are rarely at their best when dealing with numbers. Business is, however, a game of numbers. It involves counting and keeping scores. What these mean is that the Small Business Owner must come to terms with the uncomfortable fact that financial management is a prime requirement for entrepreneurial success. They must realise that one giant step to being a successful Small Business Owner is an appreciation of the fundamentals of finance, a skill that will empower them to manage the financial resources of their business.
This knowledge will keep the Small Business Owner up to date on how the business is doing. It will also throw up the financial tools that the Small Business Owner can use for the efficient management of the cash flow of the business. It will enable the Small Business Owner to know when, where and how to seek the resources to finance the business.
True. The Small Business Owner need not be able to personally prepare financial statements, which Is the work of Officers in the Finance and Accounts Department. But the Small Business Owner must possess the competence to make sense of the financial statements being generated by the business.
The Small Business Owner must understand the purpose, elements and significance of documents like the income statement, the balance sheet and the cash flow statement. It is the numbers contained in these statements that monitor the health of the business.
The income statement is the scorecard of the business. It tells whether the business is making or losing money. Sometimes called the Profit and Loss Account, the income statement shows the earnings and expenses of the business during a particular period. It indicates how the revenues transform into the net income of the business, otherwise known as its profit or loss.
The key line items in the income statement include sales revenue, cost of goods sold, specific general expenses, depreciation expense, interest expense and tax expense.
The balance sheet mirrors the financial condition of the business, and discloses whether it owes more than it owns. It states the assets, liabilities and capital of the business at a particular point in time. It also details the balance of income and expenditure over the preceding period.
The main line items on the balance sheet are assets (cash, accounts receivable, inventory and fixed assets) and liabilities (accounts payable, accrued liabilities, customers’ pre-payments and short/long-term debts).
The cash flow statement records the movement of money in and out of the business, and indicates whether the net flow is positive or negative. It measures the cash produced or used by the business in a given period, and includes it’s operating, investing and financing activities.
Financial statements represent the dashboard of the business. They may appear complex and inaccessible. But they are not beyond the comprehension of the average Small Business Owner. If the Small Business Owner cannot read and understand the numbers on the financial dashboard of the business, he or she will not have the information to make the informed decisions that are essential for the success of the business. The business will literally be flying blind, with obvious and dire consequences.
The message, therefore, is that financial management is too important to be left to the Finance and Accounts Department. The Small Business Owner must put in the time and effort necessary to understand the numbers that run the business. Otherwise, he or she may not even know enough to have a meaningful conversation with the Officers in the Finance and Accounts Department.
If you need help knowing and understanding the numbers that run your business, visit the SME Clinic at https//:smefinance.org/sme-clinic/.