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The only way to keep your health is to eat what you don’t want, drink what you don’t like, and do what you’d rather not – Mark Twain
The only way to stay in business is to do the things we like the least – managing business finances.
- Suppliers are asking for payments up front because of constant late payments in the past
- The bank is returning checks due to insufficient funds
- The tax authorities are billing penalty fees for being late on sales tax payments
- Sales have increased but the business is still suffering a loss
Why does this happen?
(Yep – it’s actually me!) —————>
I was in a yoga class a couple of weeks ago when Jenny who had just advanced from the intermediate class joined our advanced class. She was fit and very strong and eager to learn more.
About thirty minutes into the class we did head stands. The room was peaceful with only the sound of deep breathing when the silence was shattered by a noise that resembled the breaking of a dried stick. It was in fact Jenny who fell and broke her arm. It’s a sound I will never forget.
What does yoga have to do with business failure? Know your basics or you will get hurt!
Many businesses fail not because the operators are deficient in the technical aspects of their business.
They fail because they don’t understand the business part of business
Here are some useful business survival tips:
1. Hire a competent bookkeeper and demand that you receive fully updated financial statements each month. (You should not have to wait longer than a week after month end to see your numbers). Your balance sheet, income statement and cash flow calculations are your business scorecard. Imagine playing a sports game without knowing the score? The principle remains the same in business
2. Create a business plan. Here is a high level list of the sequence in which the financial part of your plan should be created: (Consider hiring a professional to assist you prepare it)
a) Start with projected sales. This should be a detailed list of forecast by volume and value. Be brutally honest with yourself.
b) Calculate what resources you will need to support your sales assumptions. Examples include the cost of the sales people, inventory requirements, administrative costs, IT support costs etc.
c) Create a profit and loss statement to simulate your projected sales, expenses and resulting profitability.
d) Calculate your cash flow needs. The timing of cash flow is different to revenues and expenses. Use an Excel spreadsheet for this calculation. The spreadsheet could look something like this:
- Opening cash balance
- Plus case inflows from amounts owing to you (accounts receivable)
- Plus cash inflows from loans
- Less cash outflows relating to expenses and accounts payable
- Less cash outflows to reduce debt
- A small proprietary business: Owners Equity
- Corporation: Shareholders Equity or Stockholders Equity
- Partnership: Capital Account
- Government: Accumulated Surplus and Deficit Account
If you cannot measure it you cannot manage it.
Understanding and controlling your financial numbers is one of your keys to success.
The sooner you get a grip on your finances the sooner you will build your net worth.
Categories: Entrepreneur Blog
You are probably not as financially literate as you think
Your accountant presents you with your year-end financial statements and says: “John, I’m pleased to see that your sales have increased from last year but your profits have deteriorated and you are likely going to have a cash flow problem in the very near future”. You are stunned. You respond by saying “but my sales are up, how can my profits be down with no cash in the bank?”
What’s wrong with this scenario?
When you receive your financial statements, you should not be surprised at the results. You should know exactly what your financial situation is every month. Furthermore you should have a solid understanding of the role of a balance sheet, income statement and cash flow statement. Knowledge of these basic skills are crucial just to stay in business, let alone to be successful. Without these basic skills you are more likely to run into serious financial problems.
Do you know that:
1. An increase in sales does not mean an increase in profits?
2. An increase in profits does not mean an increase in cash?
3. The level of financial literacy amongst (non accounting) owners and managers is less than 42%?
Business’ fail for a host of reasons some of which include (in no particular order):
• Poor marketing
• Insufficient capital
• Lack of planning
• Sub-standard product
• Poor location
• Lack of business knowledge
It is widely believed, and studies have shown that a lack of business acumen training (which includes financial literacy) is amongst the most common reasons for small business failure.
If you are a plumber, (or engineer, HR professional, electrician, carpenter, computer analyst, dentist etc). – why should you care about finance and accounting? That’s why I hire an accountant, you might say to yourself…
Owners and managers who are skilled in their trades or professions usually shy away from learning about finance and accounting principles. After all, it is considered to be a dry and intimidating topic that’s only meant for accounting “geeks” right? WRONG. Consider this: Not everyone likes going to the dentist for dental work or a check-up, but for most people, it is something that needs to be done. Learning basic accounting concepts follows a similar vein of logic, it’s not fun while you are learning it, but in the end you will save yourself a lot of pain.
How can you tell if you are financially literate?
Think you know your basics? click here and answer 6 basic questions. If you can answer all of them correctly you probably have a decent grasp of basic accounting concepts. If you do not get all of them correct, your chances of success for managing the finances of your business are probably limited. Basic financial skills also arm you with the right kind of questions you should be asking your bookkeeper and enable you to have an informed discussion with your accountants. You may be surprised to hear that many people who consider themselves to be bookkeepers are not much more than data entry clerks. They may know how to enter data but sorely lack an understanding of the basic principles. Asking the right questions of your bookkeeper will help you confirm their credibility. Remember that your financial statements represent your business score-card, which needs to be accurate if you are to make financially responsible decisions. While on the topic of hiring bookkeepers, if you think that the cost of a good bookkeeper is high, the cost of not having one (or not hiring a good one) could cost you your business.
What cannot be measured cannot be managed…
Test your knowledge! Remember to take our short quiz no more than 5 minutes) to see if you really know the basics of accounting.
Categories: Entrepreneur Blog