What is one of the most critical aspects of getting to the finish line and really knowing you have arrived?
Think about this: If business is a game, what’s the scoreboard? Yes, your financial statements. The question is if you can’t read the scoreboard, how do you know the scores? If you don’t know the score, how can you tell who’s winning and losing?
Imagine boarding an airplane and while the pilot greets you at the entrance, he looks into the cockpit and says, “Wow, look at all those dials!” What would you do? You’d probably refuse to board the plane!
It’s the same with your business.
It’s the same with your business. How can you lead your employees well if you can’t read your own numbers? How is your decision making affected?
Accounting is the language of business. For better or worse, not all of us are Certified Public Accountants, and we don’t all speak the accounting gibberish. Unfortunately, when we talk to most accountants, they speak to us in gibberish. The end result is that many business owners have a phobia about numbers and accounting.
This is not about turning you into an accountant, it’s about helping you understand the language of business and then helping you use it AS A BUSINESS OWNER to make better decisions for your business.
In this blog, we will review three scoreboards: Balance Sheet, Profit and Loss, and Cash Flow Statement. A Balance Sheet is a snapshot of your company’s situation. It is a frozen picture of your company’s condition at any given moment. On the left are the things and stuff that you have in your business. What are some examples of stuff you have in a business?
The top things are liquid, meaning they can be used up within 12 months. The bottom things are hard; you can’t liquidate them within 12 months. Our things and stuff are bought with money we either owe or own.
Let’s first look at what you owe. Who would you owe money to in business? Now, look at what you own. What do you own in the business? Now the trick is that the left has to balance the right, and it makes sense because what you have must have come either from what you own or owe, nowhere else. The fancy names for these are Assets, Liabilities, and Equity.
Profit & Loss is a report about how much profit you EXPECT to make. It’s simple, your sales minus expenses equal profit.
Where do people usually look when they get this report? At the bottom line, and that’s it. So, if the bottom line is good, then they go out and have a drink and if the bottom line is bad, then they go out and have a drink. So, while everyone is out getting drunk, no one is bothering to analyze what’s happening above the bottom line. Think about this for a second. Is there a difference between a business that has red numbers and the one in green? Of course.
But remember, a P&L is a report of how much profit you’re SUPPOSED to make. Let’s consider the real importance of your P&L; the report shows your net earnings or loss over a period of time. At a minimum, you should run your profit and loss statement monthly and do a month-over-month comparison of your income and expense trends. It is also important to do a year over year comparison, showing your percentage differences, so you have a benchmark to review. By having an annual benchmark, you can then compare your business to similar businesses in your industry. This will allow you to make adjustments to areas such as marketing and sales strategies, as well as look for ways to manage your expenses. The idea is to increase that all-important number, your bottom-line profit. Additionally, by analyzing your net profit over a period of years you will be better able to budget for future profitability and expansion opportunities.
The final scoreboard is the Cashflow report. There are three types of cash flow: Operating (what you make out of running your operations… it’s a sign of how efficient your operations are), Investment (how much money you’re investing into assets), and Financing (how much of other people’s money are you using to run your business).
Many businesses get into trouble by not separating these. Each type of cash flow can have a minus or a plus. If you have sales, then it means positive operating cash flow, if you pay expenses it means a negative ops cashflow. Knowing this will help you book your cash transactions properly.
6 Rules for Increasing Cash
1. Decrease assets
2. Increase liabilities/capital
3. Increase revenues
4. Decrease cash expenses
5. Improve productivity
6. Optimize timing
Now that we know the numbers, many people tend to focus on reaching the numbers and stress when they don’t.
Learn to understand and embrace the law of cause and effect. Your numbers result from activities that you do; activities happen because of decisions that management makes. So, if you’re not getting the numbers you want, review your activities and the decisions behind those activities. And if you’re not happy with that, review your management. That’s why coaching starts with the owner/management; because this is the beginning of the cause.
Remember, accounting is just converting activities into numbers and back again. Nothing more than that.