Financial management of a small business is a challenging endeavor. For any business to succeed, cash must flow and profitability must increase at a rate that provides a reasonable return on investment. Yet the fluid nature of a business sometimes makes keeping track of performance as easy as nailing Jello to a wall.
I often remind my clients that "you have to keep score if you want to win the game." Good financial management of a business begins with keeping good financial records. Knowing what to track is the most important part of developing an effective bookkeeping system. Most businesses only have a few "key performance indicators" that will provide the vital signs for success. Reviewing these indicators on a regular basis will help assess the true health of your business.
For those who do not have a strong accounting background, I would suggest a little bit of independent study with some industry reports of financial ratios you should watch pertaining to you specific business. Ratios tend to be a good measure to compare your business against industry standards and any good financial analysis would consider measures of liquidity, profitability and return on investment. If you are not familiar with these terms, no worries, there is always time to do a little self study, talk to your accounting professional or you can visit your local SBDC.
As someone who had no accounting background before going into business for myself, I often made decisions based on intuition of performance, not the facts. It is amazing how many small business owners are guilty of making that same mistake. Sometimes, a quick review of financial performance will help you recognize that your intuition may have been wrong.
The numbers don't lie and if you are keeping good financial records, the vital signs of your business will become glaringly apparent; and for many small business owners, it is not uncommon to find these vital signs conflict with the owner's intuitive measures of performance (which is usually the checkbook balance).
I often tell my clients that checking account balances and profit & loss statements only tell a partial picture of their businesses' well being. The balance sheet is the only financial document that tells the complete story of financial performance. Because of this, I strongly suggest you maintain a bookkeeping that allows you to review a fairly accurate balance sheet on a monthly basis. By paying attention to some trends of key performance indicators on your balance sheet, you will have a better idea of the true health of your business.
At a minimum, the review should include:
Liquidity - is your cash balance in your checking account increasing? Are inventory levels and accounts receivables increasing or decreasing?
Profitability - did you have more income than expenses for this period?
Return on Investment - is the percentage of profitability divided by your assets increasing or decreasing? You may also want to measure this against just your fixed assets.
Again, there is no need to worry if you do not understand some of the financial terms and ratios being discussed. There is always time to improve your financial knowledge and I guarantee that a better understanding of finance will help you make better business decisions.
Keep in mind that the numbers will only tell you the story of what has happened to your business to date. The numbers can't tell you why your performance has improved or declined. Knowing why your business has arrived at its current financial state is always going to be a challenge. Sometimes the reasons are very apparent, but other times, it may be a combination of factors. In some cases, the causes may be mismanagement and an honest assessment of your management decisions should be part of the process.
No matter what the reasons may be for your performance to date, there is always hope for a better future. Tomorrow's balance sheet is always going to differ from today's if you are conducting business. By learning the lessons of how your business has performed to date you can develop plans to improve for the future.
Once you have honestly addressed why your business is where it is, you will be better positioned to develop plans to grow and prosper in the future. Any effective plan should have a scorecard of what you intuitively think will happen. This way you can measure success and make adjustments if things don't go as planned.
Growing a successful business is a balance of measuring performance to date and developing new possibilities for a better future. As you study your performance, don't dwell only on the results; also think about what you are going to do better in the future. As Robert Kennedy once said, “There are those who look at things the way they are, and ask why... I dream of things that never were, and ask why not?”
No comments:
Post a Comment