One of the keys to success of any business is the importance of knowing your numbers. What does knowing your numbers mean? As a business owner, you need to understand what your financial numbers are telling you about where you have been, where you are now, and where you are going. There are 4 areas of focus that will help you feel more confident about your business. Each week I will share one area.
Understand your Scorecard
At some point in time most of you have played golf (or at least mini-golf). At the beginning of your golf game you are given a scorecard to record your score. When you start the game, do you immediately put the scorecard in your pocket and don’t look at it until the game is over? Do you wait until 9 holes are completed and then see how you did? I would expect that most of you look at your scorecard after every hole and record how you did. The same is true in business. Your financial reports are your scorecard – they reflect every action you take (or don’t take) in your business. The cash flow, profit and loss statement, and balance sheet are key scorecards that tell you how you are doing.
Many business owners I talk to tell me they are a bit embarrassed to say they don’t understand their financial statements. You do not need to understand all the moving parts and pieces of your financial scorecard but you do need to understand the key numbers on your financial statements.
Focus on these parts of the financial statements:
Cash flow statement: Your operating cash – how much cash are you generating from your daily business operations (excluding any borrowing). Are you net cash positive or negative?
Profit and Loss: What is your total revenue, total expenses, net income (or loss)? How do these compare to last month or last year?
Balance Sheet: How much do customers owe you that haven’t paid (Accounts Receivable)? How much debt do you have? How much do you owe vendors (Accounts Payable)?
Your accountant, CPA, or CFO should be able to easily tell you these numbers. You need to have a trusted financial adviser who can provide you the trends on these key metrics that help you run your business. As a business owner, you do not need to know all the accounting rules and jargon but that should not stop you from understanding the key elements of your scorecard.
Eric has over 25 years’ experience in small business, startup, and large companies and has held numerous roles focusing on business and financial strategy in businesses. He is currently the CEO and Owner of EDGe Business Planning. EDGe works with small business owners to help them understand their financial and business information and use it to grow their business profitably. Contact us at hello@edgebusinessplanning.com.