Sunday, February 20, 2011

Understanding Your Business Financials

“Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.” ~John Quincy Adams

Running a business requires many skills, such as marketing, management and purchasing, to name a few. All of these are important, but in my opinion, the most critical of all is finance.

Finance is the information machine that allows you to see much about your business very quickly. Truthfully, entrepreneurs who do not delve very deeply into their finances really inhibit their business’ growth and risk its financial health as well.

I can get a quick handle on an entrepreneur’s knowledge when I ask them what their total assets and total liabilities are. It never ceases to shock me how many do not know these two numbers, which are so critical.

So why is finance so important? Just about every decision you make has a financial consequence. If you are buying a product, you have to consider your cash flow both in terms of how you will pay for the item and what price you can charge for it. Additionally, if you need to obtain financing, you will have to understand how the interest rate will affect the income statement and how the principal repayment will impact both the balance sheet and cash flow.

Your finances also help you determine how much the services you provide are costing you. If you are providing a service, you must know whether you are making money on each job (job costing). If you are not, then you need to either increase prices or reduce costs. Even if you’re indeed making money on each job, you will need to continue monitoring future jobs to ensure necessary adjustments are made down the road.

Many entrepreneurs say they do not need to understand finance or financial statements because they have an accountant. Unfortunately, most accountants are not going to take the time to guide you through day-to-day or month-to-month financial decisions. There is no escaping it — you must know and understand your financial statements.

I think many entrepreneurs are intimidated by the numbers the same way they would be by a foreign language because it really is like a foreign language to them. However, there is help available.

When I typed “understanding finance” into Google, I got more than seven million hits. Obviously, there is a ton of information out there. Still, if it were that easy to go on the web and glean the information you need, everyone would be experts. Understanding financial statements really requires more than that.

Entrepreneurs can attend a seminar or have someone review their statements with them more than once and explain how each item relates to their business. When I give these seminars, entrepreneurs always come up to me afterward and say they never knew financial statements contained that much information.

Now go out and make a commitment to learning your financial statements. It is vital that you understand both their meaning and their impact on your business.

You can do this!

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