Business owners sometimes lose focus. It can happen when projects go off the rail, when cash flow gets cramped, or when the day to day issues of work take over your attention. You forget why you started your business in the first place, you forget the dream.
We are all much happier when we know where we’re going, and we know how we’ll get there. This is never truer than in business. The best way to know where you’re going is to understand your management reports, and it’s not very hard to do.
The Numbers Never Lie
In order to get your money “right”, you need to understand how to read your financial reports. The Cash Flow, Profit & Loss, and Balance Sheet, each provide valuable insights into your business.
Cash Flow Reporting
Look at your cash flow first, as it tells you everything about the day to day flow of money in your business.
At the beginning of your business, for peace of mind, you need to know that you have enough money in your account every week to meet your running expenses, that is your current bills, and/or wages, and statutory liabilities.
As your business develops, you will also want to see that there are monies available, on a regular basis, to sustain financial stability, and to meet your growth objectives.
A key to achieving proper cash flow management is ensuring that your invoicing is up to date, and that you stay of top of your collections, the Accounts Receivables.
Profit & Loss Reporting
A common remark we hear from new business owners is, “How can we be running at a profit when we have no money in the bank?” or “How can we be running at a loss, we’ve got lots of money in the bank?”
The Profit & Loss report is a “snapshot” of your business activities for a specific timeframe and understanding what it says is the fastest way of nipping problems “in the bud”.
The most important metric to grasp is that will have a “gross” profit, when you SELL your goods & services for more than you pay for them. You will have a “net” profit if the money left over in your Gross Profit is more than the additional expenses incurred in running your business, ie Wages, Superannuation, Rent, Vehicles, etc, etc.
The targets should be to run at a profit (baby steps), then at a consistent profit month to month (stable business model), and then at enough of a profit to fund the business for a specified period of time.
The Balance Sheet
Your Balance Sheet will tell you how much your business is worth, as of a specified date.
It tells you what the Equity is in your business, which is the value of your Assets (bank accounts, Accounts Receivables, properties, vehicles, etc) minus your Liabilities (Accounts Payable, taxes & superannuation owed, leases, mortgages, etc, etc).
Maintaining a healthy equity position is vitally important in ensuring that you can grow your business.
Bankers & lenders love nothing more than a healthy Balance Sheet.
While reviewing these reports regularly is important it does not mean you have to become a desk bound, report focused business owner, nibbling on paper clips.
Keeping a close eye on the reports that matter, will help you gain control of your finances. Engaging an expert to help you proactively plan your future based on the information your numbers are giving you will help you build a more sustainable business faster.
Unless you know what is slowing you down, you’ll never be able to speed up.
Ensuring that your accounts are properly managed, tying them directly to your current business goals, and reviewing them regularly, will deliver renewed focus and clarity.