Most business owners would prefer to chew on cut glass rather than pay attention to the financial results of their business. This is strange because we are in business to make a decent income and to build wealth. So take a minute out of your busy day and come on a journey of learning. Learn to understand and love your company’s financials so you can manage them as closely as you manage all the other aspects of your business.
We start with the Three Pillars of Financial Management; three key questions:
- Are we making any money?
- What are we worth?
- Where is the money?
And to get answers to these questions you only have to turn to 3 reports produced by either your bookkeeper or accountant:
- Profit & Loss Statement
- Balance Sheet
- Cash Flow report
Don’t run away. This is not complicated! In fact it is fun! Let’s explore each of these reports.
Are We Making Any Money?
Go to the Profit & Loss Statement. It will tell you how much revenue you have earned and the total of all your operating expenses. It even does the math for you. It subtracts the expenses from the revenue and tells you if you have made a profit or a loss. Revenue more than expenses equals profit. If expenses are more than revenue your business is returning a loss. How easy is that? We will explore the Profit & Loss Statement in more detail next week.
What Is the Company worth?
Here is where there is some minor confusion. To determine the worth of the company you don’t turn to something called the Company Worth Report; instead you turn to the Balance Sheet, it’s name having nothing to do with worth or value. This report provides you with the value of the company’s assets (e.g. cash in the bank) and liabilities (e.g. money owed to suppliers). So if the liabilities are more than the assets you have some explaining to do. We will return to this later in the series.
Where Is the Money?
And finally, one of the great mysteries of the world. The company might be making a good profit and yet there is never enough money in the bank to pay all the bills. Why is that? Many reasons:
- Your customers are paying late. The Revenue shown on your Profit & Loss is what has been invoiced not paid. So you can show great revenue but if lots of your clients are paying late then there is little money flowing into the business.
- You are not invoicing in a timely manner. Believe me; your customers will not pay until they receive an invoice.
- Someone is stealing. Huge topic for fraud experts only. If there is any concern that theft is a problem talk to your accountant about the next steps; unless it is the accountant you suspect in which case talk to another accountant.
- You are not managing the financials and the outflow of money is higher than the in flow but you don’t know it.
We will return to the fascinating topic of cash flow (or rather lack of cash flow) later in this series.
So there you go; nothing to fear but fear itself. We will continue this journey of learning over the next three weeks. Stay with it and you will rid yourself of that nagging voice in the back of your mind. You know the one. It is the one that keeps telling you that something could be terribly wrong but it is best not to know.