Know Your Numbers
A few years ago, I was asked to facilitate a session for an entrepreneur accountability group. The group consisted of 13 business owners running companies with between $2 million and $50 million of revenue and one entrepreneur, Pete, who had recently shut down his marketing consulting company.
The topic of my session was knowing your numbers. Pete shared during the session that his company had experienced significant cash flow issues, which led to the closure of the business. He expressed that he didn’t understand how it had happened. The business had been growing for several years. Revenue had doubled. He was visibly upset. He admitted that he didn’t understand anything about finance–he was a marketer–but he’d hired a CFO to take care of the numbers side of the business. After asking Pete a series of questions, I was able to home in on a potential reason and provided him feedback on how to check what I’d told him.
Pete did what I suggested and called me about a week later. He’d discovered that a potential cause that I suggested was correct. His CFO had been stealing from the business. While this wasn’t the sole cause of his company’s cash flow problems, it was a major contributor. As we dug deeper, we discovered that the company also suffered from incorrect pricing and improper expense control. Pete’s company had a CFO, but because Pete lacked any understanding of how to monitor the financial health of his own business, the business was left entirely at the mercy of an unsavory individual.
Sadly, Pete’s story is not unique. It’s a story I have come across many, many times.
For a small business owner, knowing your numbers means having a good understanding of your company’s financial health. This includes being familiar with key financial metrics such as revenue, expenses, profits, and cash flow. It also means being able to interpret financial statements, such as the income statement, balance sheet, and cash flow statement, and using this information to make informed decisions about the operation and growth of your business.
Knowing your numbers also means having a good handle on the financial details of the business, such as how much is being spent on different types of expenses, how much is being collected in accounts receivable, and how much cash is on hand. It means being able to track the financial performance of the business over time and identify trends and patterns.
There can be many potential negative impacts on a business when the owner does not understand their financials. Here are a few examples:
Poor decision-making: Without a good understanding of the financials, a business owner may make decisions that are not financially sound. For example, they may agree to terms on a contract that are not profitable or invest in equipment or marketing campaigns that do not generate a good return on investment.
Insufficient capital: Without a good understanding of the financials, a business owner may not have a clear picture of the company’s financial health. This can lead to insufficient capital to meet the needs of the business, such as paying bills or investing in growth.
Mismanagement of funds: If a business owner does not understand the financials, they may not have a good handle on where the company’s money is going. This can lead to the mismanagement of funds and potentially even financial fraud or embezzlement.
Overall, knowing your numbers means having a good grasp on the financial aspects of the business, which is essential for making informed decisions and guiding the company toward success. Here are a few steps you can take to understand your numbers better:
Get organized: Make sure that your financial records are complete and accurate and that you have systems in place to keep track of financial transactions.
Understand financial statements: Familiarize yourself with the different types of financial statements, such as the income statement, balance sheet, and cash flow statement. These statements can provide valuable insights into the financial health of your business.
Determine key performance indicators: Identify the key financial metrics that are relevant to your business. Track these metrics over time and use them to identify trends and patterns.
Seek out resources: There are many resources available to help small business owners understand their numbers. Consider taking a course on small business finance or using one of our quick tutorials.
Monitor your progress: Regularly review your financial statements and key financial metrics to track your progress and identify areas for improvement. Use this information to make adjustments to your financial plan as needed.
There are many factors that can cause a business to fail. Most of them are controllable. You’ve given your heart and soul to the endeavor you’ve launched, don’t let this controllable factor be your downfall.
Free Resource: Income Statement Know-How®
Take my free twelve-minute video course to learn how to read your company’s income statement and use the information to make better operating decisions.