Is Your Business Healthy? How to View the Numbers.By Nina Kaufman, Esq.
As you look back on the past year, and think about planning for the future, you’ll ask yourself a question reminiscent of New York City’s former Mayor Ed Koch, “How’m I doin’?”
So how are you doing? Did you have a good year and meet your targets? Is your business healthy, with a strong foundation? Are you protected against crisis? Can you answer those questions?
Like legal documents, financial statements rank right up there for most entrepreneurs as non-narcotic sleep-inducing agents. Put another way, running and analyzing financial statements isn’t sexy. Sure, the idea of $1 million in income is “hot,” but it takes on a different significance if you have $2 million in debt.
And like those incomprehensible legal documents, what you don’t know can hurt you. Financial illiteracy has plagued many a business owner (and I certainly wasn’t immune to that when I first started out). But, as Rochelle Lisner of Dynamic Business Growth is fond of saying, “You can’t change what you can’t measure.” If you’re only looking at the top line without focusing on the bottom line, you have an incomplete picture.
As the E-Myth points out in its article, “How Healthy Is Your Business?” if you don’t have a clear picture of your business, you end up making decisions in a vacuum. Which lines of business are most profitable for you? Which ones should be dropped altogether? You won’t know unless you understand what the numbers are telling you.
The basic financial statements that you’ll want to review regularly are:
- Your company’s balance sheet. A balance sheet provides a snapshot of your company’s financial health as of a specific date. It tells you what you have in the way of assets (what the company owns/controls), liabilities (what the company owes), and equity (what’s left over for you, the owner).
- Your company’s income statement (also known as a profit and loss statement, or P&L). This measures your revenues (income) and expenses over a particular period of time (e.g., a month, a quarter, a fiscal year). When you subtract expenses from revenue, what’s left is your “bottom line.” Note that your bottom line could well show a net loss if your expenses are greater than your income.
- Your company’s cash flow statement. Aptly named, the cash flow statement looks at how cash is flowing through your company. It looks at where money came (or will come) from and where it went (will go).
Not exactly sexy, right? Then again, going bankrupt isn’t sexy either. We don’t come out of the womb instinctively understanding financial statements, but it can all be learned. See the videos available at BestSmallBizHelp.com, or check out free seminars often run by local Small Business Development Centers. While you can certainly hire a temporary CFO, accountant, or other strategic advisor to help you understand the numbers, you’d be well served to have a basic understanding of your own–rather than just relying on these advisors’ say-so. The tabloids are rife with stories of wealthy people who entrusted their financial decision-making and interpretation to others, only to find out they got bilked in the process.
You can’t expect to make an intelligent decision without a full understanding of the financial dynamics of your business. After all, in the end, you’re in business to make money.
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