Seven reasons why you need to know your numbers
Guest post by AIM's 2014 Young Manager of the Year, Finn Kelly
What is the most common reason that you are stressed as a small business owner? I am sure that most people would answer cash flow problems.
At Wealth Enhancers, when we sit down with a business owner to discuss their plans, one of our first questions is, “Where does your company stand now?” In other words, what is your current financial position? Many owners can come up with a vague answer such as, “we're doing really well” or “we could use some more cash”. But they might not have a firm grasp of their numbers.
We aim to make this clear: If you run a business of any size, it's critical that you understand your financial situation at all times. And here's why:
1. Your financial position is your unbiased scorecard.
Numbers are not subject to “creative interpretation”. Either your business is making money or it is not. Either it is expanding its market share or it is not. These numbers are completely transparent in your accounting and therefore completely unquestionable in what they show.
2. Your numbers show which parts of your business are working and which are not.
Perhaps one line of products is not profitable but you wish to invest in it because you believe it will become profitable. You can choose to do so, or you can choose to get rid of unprofitable lines and concentrate on the profitable ones. But you can do this only if you know your numbers.
3. Your numbers give you the ability to make decisions based on logic and not emotion.
Emotions can get in the way of making good business decisions. When you remove all emotion (hope, fear, greed) and instead base your decisions on your actual financial performance, you can be sure that your decisions have been made using objective inputs.
4. Small problems can be identified and remedied before they become large problems.
If you frequently update and review your financial statements, you can be sure to spot issues as they arise rather than once they have already been in place for a while. If your market share is dropping in a particular segment, if certain expenses are climbing – these issues can quickly be found, and examined for their cause. You can take steps to remedy a negative situation before it starts to impact your business in a major way.
5. Stakeholders require financial information.
If you want to borrow money in order to grow your business, your lenders will need to examine your financial position in detail. They will determine if they feel you have the ability to repay them. Before you even approach a lender, however, you should have already reviewed your numbers and established for yourself that you are ready to grow your business. You should be able to show where you currently stand and to what degree you believe your new endeavours will increase your profits. If you cannot demonstrate these numbers to a potential lender, you will never get approved for a loan.
6. Familiarity with your financial statements is also one of the best ways to head off any potential funny business among your employees or partners.
If you review your numbers regularly and in detail, there is less opportunity for someone to siphon off some money into their own pockets. You will know what the numbersshould look like, and will quickly notice if something is suspicious or out of place.
7. And finally, for your own peace of mind, it's important that you understand your numbers.
You won't be worrying that you're about to go under. You'll have contingency plans in place – emergency funding lines, insurance – to be able to quickly take care if any problems that arise. You'll know, without a doubt, that your company is growing and prospering.
Finn Kelly is the CEO and co-founder of award-winning Gen Y financial advisory firm,Wealth Enhancers, along with the parent company, premier private wealth management firm WE Private.