17
Nov
14

When your Financials speak …

ListeningIf you were your company’s financial reports, would you feel ignored and disrespected? Or even worse … would you feel irrelevant? This may sound weird, but your financial reports have “feelings” too. They can feel strong, healthy and full of vitality. Likewise, they can feel sick, anemic, and in extreme cases, near death. And just as when your child is not feeling well, all you have to do is pay attention, understand the signs, and “listen” to what your financials are telling you about their past, current and probable future condition.

Entrepreneurs tend to view themselves as visionaries with the passion and drive to chase their dreams and build a company. It doesn’t matter if that company is a one-person enterprise or a multi-location behemoth with hundreds (or even thousands) of employees … all financials speak the same language and share the same vital signs.

Consumed with the passion and drive to grow a company, too many entrepreneurs simply ignore or avoid their financials. Some say they’re just too busy and that there is no time. Some claim “numbers phobia” as if reading financial reports is some form of mental torture. Many simply never had the proper training to understand the very simple language that financials speak. The fact is, when it comes to your company’s financial reports, sooner or later what you don’t know or understand IS going to hurt you.

Over the years, I’ve met many extremely bright and talented entrepreneurs that live in a perpetual cash crisis simply because they refuse to listen to and understand their financial reports. Forcing a business to live on the brink of insolvency and financial disaster is the most stressful, debilitating and depressing way to run a company. The good news is that such an existence is completely avoidable. All it takes is some financial literacy training and discipline.

Here are some No-Compromise insights on financial reports and how to truly listen and understand what they’re saying:

  • It’s about stuff: All financials speak in terms of assets, liabilities, equity, income, expenses, profit and the increase or decrease in cash. Your company owns stuff, owes money on stuff, has equity in stuff, sells stuff (products and/or services), and spends money on stuff – all with the intent of making profit on that stuff. The objective is to accumulate stuff (assets in the form of cash, inventory, equipment, etc.), manage your liabilities (payables, credit card debt, loans, etc.), and create equity (when assets are greater than your liabilities). The profit part is easy – spend less than the income your company generates. Okay, you’re probably thinking, “Neil, you just told me the obvious.” My response is, “If it’s so obvious, show me your double-digit profit and impressive cash reserves.” Knowing financial discipline and living it are two entirely different things.
  • Financials tell the truth: You’re either making profit or you’re not. You’re either creating equity or you’re not. Your payroll is either manageable or it’s not. Your cost of goods sold is either within benchmark or it’s not. Either you can pay yourself or you can’t. All it takes for your company to be profitable and financially healthy is understanding and controlling a couple of critical numbers. If you don’t know what your critical numbers are, you’re driving your company financially blind. It doesn’t matter how big and impressive your company appears to others if just behind the curtain is a financial train wreck burdened with debt. Listen to and understand the truth your company’s financials are trying to tell you.
  • Perpetual numeric readout: Your financials are a perpetual numeric readout of your company from its birth to present day. That means you have a wealth of historic financial data that allows you to identify problems and potential problems with extreme accuracy. With today’s technology and applications like QuickBooks, there is no reason or excuse not to have accurate and timely financial reports in the form of a current Balance Sheet (Assets = Liabilities + Equity) and Profit & Loss Statement (Income – Expenses = Net Profit). At Strategies, we run a full set of financial reports every Thursday … and we’ve been doing this for 21+ years. It only takes a few minutes of each week to identify which numbers are heading in the right direction and which numbers are not. If you’re waiting weeks to receive the previous month’s financial reports, you’re waiting too long.
  • Cash is more than king: Managing cash and building cash reserves isn’t luck … it’s 100% discipline. Every day, every month, your company experiences an increase or decrease in available cash. In addition to your operating checking account, the simplest set up is to have a savings or cash-reserve account. Set aside a certain percentage of weekly or monthly revenues and squirrel it away in the reserve account. Start with 5% of income and see how you do. In more profitable months, keep feeding your reserve account by transferring cash that exceeds your operating expenses. This is especially necessary if seasonal gift card sales are a factor in your business. Spending incoming gift card cash today can set you up for a cash crisis when the redemptions come in and the cash is already gone. The cash management game is all about discipline.
  • The insanity of checking checkbook balances: The fact is that money in your checking account is rarely “available cash” because of checks written that haven’t yet cleared. If you are constantly online checking how much cash is in your checking account in order to decide which bills to pay…your company is already deep in financial crisis. Checking account balances are for reconciling your checkbook – not for financial decision-making. If this describes anything close to how your company operates, you need immediate help in the form of financial coaching.
  • The infamous “Cash-Flow Plan”: At Strategies, we’ve been teaching and coaching owners on how to create and live a cash-flow plan. Unlike your financials that are historical reports, your cash-flow plan is a forward-looking monthly projection of revenues and expenses. We fondly call it your “Boss.” Some owners call it “Flow” … as in, “I need to ask Flow if I can afford it.” And after 21+ years of teaching and coaching cash-flow plans, it is still the one discipline with which too many owners wrestle. Those that embrace the cash-flow plan turn losses into profit and cash into cash reserves.

When your financials speak … listen. No Compromise!

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Please share your thoughts with me about today’s Monday Morning Wake-Up. Click here to comment.

Pass this e-mail on to your business colleagues, managers and friends. They’ll appreciate it.

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