To start, do not be intimidated by the concept of finance. A lot of people think they need to be amazing at math or have some special type of intelligence to understand finances and that is far from the case. You don’t have to be a genius with numbers to understand what they are telling you about your business. Aaron can help you take the mystery out of numbers and make you a good finance person. This is different to accounting, for which you do need good math skills and should hire a specialist. But to run your business well, you need to be able to look at reports, understand what they mean, and make businesses decisions based on that understanding.
Much of what we do when consulting on finance is make it approachable for you. Finance is something you can do. To run your business well, you have to deal with finances. Familiarity with the tools of finance and what they mean to you takes away the fear factor.
Boiled down to basics, finance is managing your company’s business to ensure profitability. There are three essential components to this – the profit and loss sheet, the balance sheet, and the statement of cash flows. A profit and loss statement will include income, expenses, and profits for your business. The balance sheet tells you how efficient your business is. The more efficient it is, the more profit you make. A statement of cash flows tells you how much money you have in the bank. If you read them accurately, you can figure out why you have more or less money this month than last.
You should look at the profit and loss statement at least once per month. Then, review the statement for the quarter; at the end of March, review January through March. This allows you to see what direction your profits are going so that you can adjust your finances promptly. You need to do yearly comparisons for the same reason. Unless you compare your profits and losses from year to year and month to month, you don’t know whether your business is doing better or worse than it was. Aaron will review profit and loss statements with you so that you understand what each line means and so that you can compare figures from month to month and year to year and gain an understanding of how your business is doing financially. You will understand your bottom line, your income sources, and your break even point. We remove the mystery and thereby the fear.
The balance sheet will show you how efficient your business is. Many business owners barely learn how to decipher a profit and loss statement and are clueless about the balance sheet. It’s vital to understand what the balance sheet can tell you because it goes one step further than the profit and loss sheet to allow interpretation of financial data. Used with the profit and loss statement, it will tell you what is desirable about your business. We will go over the balance sheet with you so that you understand every line and what it means, as well as how to compare it with the profit and loss statement to ascertain efficiency. These include things like assets, liabilities, stockholder’s equity, and retained earnings. This type of review will tell you what your business owns and how it was paid for.
Comparing the profit and loss statement with the balance sheet will tell you not only how much money your company makes, but how much money it takes to generate that sum. Obviously, the less money it takes to make x dollars, the better for you. Knowing what is and isn’t working in terms of generating income allows you to change things to increase efficiency and profitability. Our team can help you learn about asset turnover, return on assets, and the profit margin. You will learn to assess the collections period and the days sales in cash and calculate the quick ratio.
The third major component of learning finance is the statement of cash flows, which tracks how much cash is coming into your business and how much is going out. Your accountant can create a statement of cash flows by analyzing the profit and loss statement and the balance sheet. As with those tools, we can teach you how to understand every line of a statement of cash flow, from net increases and decreases in operating activities to the total increase or decrease in cash balance. A savvy business owner needs to learn the difference between operating activities, investing activities, and financing activities.
In addition to understanding the statements that monitor your finances, there are several sound business practices every entrepreneur should follow. These include regular monitoring, expense control via frugality, the decision about whether to lease or buy, and danger signs to watch for in business. We teach the best ways to do each of these things and what to look for when you do them. We can help you set financial goals, what to do when you’re running short of cash, and how to analyze what you should charge for your services. Other important topics include proper insurance levels, borrowing against your business, how to legally run personal expenses through your business, and how to create a reserve account. We can also help you confront and debunk financial myths.
Don’t avoid finances because you think they are too complex. Finance is not simple but it is straightforward and there are answers there if you learn how to find them. The more you know about your business, the more you can ensure its long-term profitability.