I once had a client who had no idea what his bank balance was. He had an approximate idea what the company was spending or taking in each month, but no detailed knowledge. He was too busy selling. And he was a great salesman. Driving everywhere, never tiring, always looking for opportunities. But how can you run a business without understanding your numbers?
Recently, I've been hearing people say that they don't even want to look at their investment reports or their bank statements. With the recession hurting everyone, that's an understandable reaction. It can just seem easier to hide or to ignore the bad news.
But a business owner cannot afford to do this. If you're a start-up or a going concern, it's time to look at your books. This is a time when you should really ask yourself how you can save money and send more to the bottom line. If you're starting out, can you bootstrap and grow organically? Do you really need a loan or even an angel investor? You can only know this by looking at your finances.
The simplest action you can take is to get our your checkbook -- or go online and look at your bank statements -- and see how much you are spending and taking in each month. Then, create a spreadsheet on your computer with Excel, using those numbers. Put your expenses into the usual financial reporting categories - sales, cost of good sold, overhead, interest, operating profit, net income, etc. If you have an accountant or bookkeeper, get them to show you the books and explain things to you.
A lot of entrepreneurs are not that great with numbers or even using Excel or QuickBooks. But Excel provides a great way to keep track of your finances. Once you've put in the formulas, and copied numbers out of your checkbook, you can see where you've been and forecast the future. You can see how changes in your assumptions about the future will affect the bottom line. You can see how much cash you'll have to cover your operations and how much you might need to borrow. Understand your cash flow. Look at the timing of the revenues and expenses. How can you handle the gaps?
If your credit card companies are killing you with higher interest rates, you can see the effect and maybe try to talk them out of it or switch to another company that will give you better terms. If your bank is cutting your line of credit or raising your interest rates, you'd better be able to understand the impact. But look at the effect on your spreadsheets first. Knowledge is power. And your numbers tell your business's story.
If you don't want to use Excel, for Pete's sake, just sit down and do some figuring with pencil and paper. Think about holidays, seasonality and other things than can affect your revenue and your costs. If you need help, "Excel for Dummies" is a good book for explaining what to do. The SBA's Web site also has a lot of great information on how to do financial forecasting. www.sba.gov. It can help you understand the difference between an income statement and a balance sheet.
I can offer help, too. One hour of consulting for less than a lawyer or accountant would charge. Contact me at firstname.lastname@example.org or at Twitter: www.twitter.com/upstartwyn