Not every business has the luxury of hiring its own CFO to monitor the financial health of the business. And, if you are like most business owners, you did not get into business because you love business finance. On the contrary, you probably had a passion for other aspects of your business and business finance was seen as a necessary part of business operations. Over the years that I have worked with business clients, I have had clients who were extremely diligent about monitoring their financial information and I have had other clients who rarely looked at their financial information. It is not unusual for many business owners to expect their accountant to monitor the business’ financial condition.
Is it possible that business owners that monitor their financial information are the 20% that survive and the ones that do not monitor their information are the ones that get included in the 80% of all businesses that fail within the first 5 to 7 years? That’s probably too simplistic since some business owners manage to succeed in spite of themselves and it does not necessarily mean that they have a grasp on the financial condition of the business.
If business finance does not ‘ring your bell’ how can you get a grasp on the basics so that you know more about your financial condition? Here are a few basic tips:
- When a lender asks for your ‘financial statements’ they are asking for both the Balance Sheet and the Income Statement (Profit and Loss). If you provide only one of the statements, you are giving away the fact that you do not understand the relationship between these two financial documents.
- The Income Statement tells you how you did last year.
- The Balance Sheet tells you how you’ve done in the past.
- The two statements combined, tells the ‘story’ of the business.
- If you spread three years’ worth of financial statements, side by side, on a worksheet, it will be easy for you to see trends in your business that you would not otherwise notice.
- The ‘Net Income’ shown at the bottom of your Income Statement is not what you have in the bank! However, it does get carried over to the Balance Sheet and it is added to or subtracted from your Retained Earnings depending on whether you post a profit or a loss.
- Consistent negative retained earnings, on your Balance Sheet, reflect impending insolvency. It also means that you have either posted consistent losses or you have drained the business of all profits. Either way, it is not a good thing! You cannot grow a business without retained profits.
- Just because you are profitable doesn’t mean you will survive. You will need cash to survive. For this reason, if nothing else learn how to project your cash needs, long before you need the cash.
- If your accountant or bookkeeper prepares your financial statements, it will be imperative that you provide your month-end information to them as quickly as possible so that they, in turn, can provide the financial statements on a timely basis. Take the time to look at the financial statements. If you don’t understand your them but you would like to be more knowledgeable, ask for help from your accountant or call and schedule a meeting with the
. Small Business Development Center
A business owner may feel embarrassed about not understanding the business financial statements. However, the only thing a business owner should be embarrassed about is not asking for help. When you are playing the part of chief, cook and bottle washer for your business, it is difficult to add the CFO responsibilities to your job description. But help is available and it is as close as a phone call away. If you want to access some basic training on business finance, call the Longview Small Business Development Center (SBDC) at 360-353-3428 or use the link in the sidebar for the Washington Small Business Development Centers to find the SBDC that serves your area.