In the simplest terms, you sell something (revenue or income). You have expenses to provide those goods or services (expenses). You have either money left over (profit) or you don’t (loss). Generally speaking, the objective is to have money left over so you can do something with it.
In slightly more detail each of these gets into more specific such as gross or net profits or losses. For the sake of this week’s insights we want you to focus on the three dashboard financial instruments to effectively run your business. They are Income Statement (also referred to as Profit and Loss Statement, P&L), Cash Flow Statement, and Balance Sheet.
The Income Statement identifies if the transactions of a cycle of time generated income greater than expenses or a loss which is expenses greater than income/revenue or basically sales.
Cash Flow Statement identifies dollars flowing thru your business. In business – “Cash is King” so knowing your cash flow is critical to your success. When you hop in your car prior to a long trip you typically will look at your gas gauge to determine if you can make it to the destination etc. Cash flow in your business is just that – do you have enough cash to get you to your destination.
Balance Sheet identifies other additional critical aspects of the business financials such as loans, debts, liabilities, assets etc. and ultimately let you know if there is “Net Worth” to the business or what you as the business owner actually own outright without any encumbrances.
These three financial tools need to be part of your ongoing business management efforts. You may have talented staff working in your finance area doing the details, but you as the owner MUST have an intimate knowledge of your business dollars and cents. When you drift away from this discipline you leave yourself exposed to theft. It might not come in the form of someone blatantly taking money out of the cash register. More likely it is by checks written to vendors that magically appear and are supported by invoices and payments which when researched just don’t contribute to your company’s strategies.
Unfortunately, there are many business owners who have trusted employees to such a large degree that they took their eye off the financials and it was almost too late to recover the impact of the cash flow drain caused by these improprieties.
Another critical use of these tools is understanding your receivables and payables so that you can effectively manage the cash flow of the business. Knowing when to tap into a line of credit and the cost of interest on that money while your customers/clients use your money to fund their business transactions.
Front-ending these tools is the management of your sales pipeline to identify the trends of sales and income to support the movement of money through the business. This “Art” of forecasting is both scientific (the numbers) but also instinctive (the gut). This makes the sales pipeline process something you need to be in regular touch with, so you can adjust your expectations based on your wisdom and knowledge of the industry and economic dynamics.
This week take some time to reacquaint yourself with your financial tools and dive deeper into their value for you and your business. Engage your accountant/CPA to help you more fully understand the subtleties of the values so you can begin to make tweaks to your operations and see a greater contribution to your bottom line.
Struggling with focusing on the dashboard for running your business? It is time to call JKL Associates at (313) 527-7945 to bring your business into the age of knowing the numbers and using them for your benefit.