A colleague shared a coaching story with me recently. His client was in a panic because money was tight and he was facing another payroll without sufficient funds to cover it. He told me that, in the course of analyzing the situation, he asked the client how often he reviewed his cash flow statements.
“What’s a cash flow statement?” the client asked. My colleague knew then that the problem was deeper than being short on cash that month.
Business owners can find it hard to see their own businesses objectively. Being so into the day-to-day activities can blur the bigger picture of how they function. One effective approach that I’ve noted in this series of psots is to view your business as six major areas of accountability.
I refer to them as Management, Marketing, Brand, Sales, Delivery and Finance.
So, let’s take a moment to look at the Finance operations of your business.
Managing Your Company’s Finances Is Your Responsibility
As a business owner, you probably think about money a quite often. Possibly every day. You may talk about it. You may worry about it. And you likely plan for what you’ll do when you have more of it. But how often do you actually look at your business finances? And, just as importantly, do you understand what you are looking at when you review your financial information?
I’m not suggesting that you should have the skill set of an accountant or CFO, but you can and should have a basic understanding of your income statement, balance sheet and cash flow report. There are other documents and reports that you may need to understand and use, but these three form the foundation for “seeing” your business properly.
The problem for too many owners is that they either avoid financial management or abdicate the responsibility for it to other staff. This is either willful ignorance or a deadly misconception because no one else is at the help of your business and money is the driving force that moves it.
Being the proper financial leader of your business means developing the right mindset toward money. It also means that you need to have a good financial team in place. Finally, it means having an effective financial system that allows you to see what you need to see only when you need to see it.
Why Business Finance Management Matters
Money is the fuel of your business. It is the energy source that powers your business. You already know this because you know that if your business uses more money than it generates, eventually you’ll have no business at all.
Another key purpose of money is that it is a metric for your business. Not only is money the fuel in your ship, it’s also your tachometer and other gauges. And reviewing and analyzing your financial reports allows you to measure both the health and the worth of your business.
For business owners, having a solid financial team allows you to manage finances effectively. This is an important aspect of having the right mindset for financial management. Understanding the proper relationship between you and your financial team means you can delegate tasks effectively while still being informed and in charge.
Depending on the size of your business, this team will be comprised of a CFO, controller, bookkeeper, and your CPA. Each of these have a specific role to play in the strategic the interplay of financial management tasks for your business.
Putting It All Together
By understanding your income statement, balance sheet, and cash flow statement, you can understand the basics of all the other financial tools and reports your financial management team should be using.
For example, cash flow analysis, budgeting, and financial forecasting are all based on the data collected and reported in these financial statements. Going back to our brief analogy of gauges, it is helpful to think of these three financial statements as measuring different elements of your business course:
This document describes your business’ performance by Indicating its sales and expenses over a period of time. Also known as a profit and loss, or P&L, statement, it shows the difference between sales and expenses as net profit. (Often times an indicator is used called EBITDA: Earnings before interest, taxes, depreciation, and amortization)
The balance sheet describes your company’s health and its book value. This of it as a “snapshot” in that it indicates the financial position of your business at a particular point in time and always includes assets, liabilities, and equity.
CASH FLOW STATEMENT
This often ovelooked report describes your business’ cash position by summarizing and categorizing how your company generates and uses its cash over a period of time.
In a very real and unvarnished fashion, your financial statements create an accurate picture of your business. The reality is that everything in your financial statements reflects something you do in your business. And, because of this, your financial statements are indispensable management tools. IF used properly and regularlty, they will tell you what’s going well in your business and what’s going wrong.
More importantly, they tell you how seriously right or wrong things are. The good news is that you don’t have to be an accountant to understand financial statements. Your business knowledge shapes the way you read and interpret them.
The key is to have a documented system, or process, in place to regularly and consistently generate these three documents and to take the time needed to review and analyze them, as well. Depending on the size and financial complexity of your business this could be once a month or even once a week. And there are some types of businesses – high volume retail, for example – that might review cash flow statements even daily.
Making It A Priority
The key is to start now and not put it off. Observe your own attitudes about money and take steps to align them with your proper role as a leader. Talk with your financial management team, even if it is only your bookkeeper and CPA. Start with where you are and build on that foundation with a goal of fleshing out both your team and your process over time.
If you’d like to start improving your financial management process, please sign up for a free consultation where we can discuss this or any other topic that will move your business forward. And be sure to subscribe to my YouTube channel for videos on this and other business success topics. Also, click this link to take my free Assessments.