Finance is the language of business and you don’t need to be a genius or a mathematician, or even an accountant to understand the financial performance of your company what you need is a grasp around the fundamentals which is the financial stool.
Now the financial stool helps you understand why you have to look at three specific documents in your company if you only look at one, you will fall over much like a one legged stool is completely useless Let’s look at the first leg which is your profit loss statement, or your P&L you’re probably quite familiar with this document It’s quite an intuitive document, it shows you how much profit you have made in your business over a specific period of time this is really good information but profit is only part of the story one third of that story.
What you need to understand is where is the cash being tied up in your company your balance sheet helps you understand the value of the assets in your company it helps you understand your debt position and it gives you real clues as to where the cash is stuck in your company.
If you are spending too much money on assets, if you are holding too much stock if you are taking too long to get paid your balance sheet gives you all of that key information Check out “Episode 2” of Mind Your Own Business for more on the cash gap
Next is your cash flow statement,a Cash flow statement helps you understand how money has moved in and out of your business and it helps you understand that in terms of whether the money’s come in from you, the shareholder, or a bank, or from your customers or from other investing opportunities in your business and it also helps you understand how money is going out to those sources too.
So for example if you pay off a loan you will see the interest portion of that loan payment come out of your profit and loss as an expense you will see that your debt position will reduce a little bit and your cash position will reduce by the amount that you paid for that debt but you will see all of that money flow out of your cash flow statement to the bank You need all three of those dots joined up so that you can really understand what’s going on in your business and there are many other examples of things that show up in different ways across the three financial statements.
The key message for you this week is: where are you looking? Which documents do you tend to look at and are those documents giving you enough real-time information to really understand what’s going on in your business If you’re only looking at a P&L every quarter or, God forbid, every 12 months then that is clearly not good enough If you’re only looking at a P&L on a monthly basis not looking at your balance sheet and not taking the time to understand your cash flow statement there are things that you will be missing that will really help you understand the performance of your business.
Your company exists for one reason, one reason only and that is to make profit but that profit is useless, if it’s stuck in other places and not flowing into your bank account so that you can do useful things with it.
Now, I know that you probably want to invest in your people you want to invest in your business but if you do not get this financial stool operating in the right way because you’re not paying attention to it and making decisions because of it then you’re just not going to reach your full potential Make sure that you look at the stool, understand where you need to focus your attention.
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If you’d like help implementing these tactics then contact Marco Soares for professional coaching for business .