Businesses succeed or fail based on how well they meet the needs of their customers. Meeting those needs is done through a combination of product and service features, pricing, and delivery. Businesses that do these things well tend to be successful, at least initially. That’s Business 101.
However, for businesses to thrive they must understand finance. Too often businesses stumble, and sometimes fail, because they do not understand their own financial statements and the implications of those numbers.
It is common for business owners, particularly entrepreneurs, to focus on sales and have an inadequate grasp of finance as it applies to their business. “Let the bean counters do that, I’ve got customers to take care of.”
Without an adequate grasp of finance it is likely that you will not adequately understand where the money is coming from, or what is making the business successful. Not having a solid understanding of profits, and how those profits are affected by financial figures and ratios, is a common symptom of a business headed towards failure.
Owners fear finance. They seem to believe that it is too complicated to understand, so they avoid learning enough about their finances to manage their business successfully. They just hope that things will keep going along well enough that they will not need to learn finance or their CPA or bookkeeper will know enough to warn them about impending disaster. Luck is not a plan.
Once the basics of financial statements are understood, i.e., how the money flows among the three key financial statements – cash flow, profit and loss, and balance sheet – the business owner can begin to track those money flows. He or she will know where the money is coming from, and where it is going. That information can then be used to forecast the future flows of money, both good and bad.
In addition to the financial statements, with the understanding of a few ratios, and how they compare to similar businesses, you can understand which parts of their business are extraordinarily successful, which are average, and which are below par. Incredibly useful information that can make or break how you manage your company.
Learning and using the basics of finance does not require an MBA or CPA…It’s not rocket science. It does require learning the basics and then tracking those numbers monthly. These powerful figures can then be used to measure the performance of the business and managers, and plan for a successful future.
The man who learns not to fear finance but to use it as a business tool will have a significant advantage over the competition. The knowledgeable owner and manager will be able to predict the effects of changes in the business environment on his or her business, and will be able to prepare before any effects or changes come crashing over the bow of the business.