For Small Business Owners & the Self-Employed

Insider Secret:

Measuring Results: What Every Business Owner Needs To Know

In order to succeed in business, you need to be able read and interpret financial data.  Here are some basic, yet powerful financial tools to help you master the numbers side of your business

by Alex Goumakos, CPA

Note: The following is adapted from Chapter 15 of Gold Mine Tactics: The Business Owner's Success Manual.

If you want to succeed in business there’s no question that you’ve got to know how to read basic financial information. But merely being able to read the data is not enough. You’ve also got to know how to interpret the data and draw conclusions from the patterns it suggests.

In addition, many people, such as bankers, accountants, business partners, investors, and the government, measure business success primarily in terms of financial outcomes. As a result, it’s important to be able to communicate and negotiate in a language that everybody understands.

No matter what type of business you’re in, or what your educational background is, if you want to succeed you’ve got to have a working knowledge of basic financial concepts. This means that you need to be able to perform basic calculations and read and interpret financial information such as a profit and loss statement, a balance sheet, a budget, and so forth. I don’t know of any gold mine business owner who doesn’t have a firm grasp of the numbers side of their business.

By utilizing the following financial tools & reports, you can help guide your business along a path of growth and prosperity:

1. The Basic Set of Financial Statements - The basic set of financial statements are the Balance Sheet, Income Statement (also known as the Profit & Loss Statement) and Statement of Cash Flows. Since business results are measured in dollars, it’s imperative that you know how to read the basic set of financial statements. Sadly, many smaller business owners wait to learn about financial statements whenever they need to borrow money. Instead, they tend to focus on components or specific accounts such as cash, accounts receivable, inventory, office expense, payroll, and so forth. While this may be fine when first starting out, it isn’t nearly enough if you want to grow your business. In order to grow, it’s essential to see the whole picture. Being able to understand your company’s basic financial statements is the first step in mastering your company’s finances.
   

2. Cash Flow Projections - Cash flow projections have the same purpose as the statement of cash flows: to keep track of cash. The only difference is that cash flow projections help you deal with the future while the statement of cash flow shows how you’ve managed cash in the past. The ability to mange your company’s cash is vital to its success. A cash flow projection is an important financial tool that will help you accomplish that goal. It surprises me how many smaller business owners don’t adequately measure and project cash flow. For many, a casual glance at their checkbook balance is the extent of their cash flow management. Unfortunately, looking at and balancing your checkbook is not the same thing as measuring or projecting cash flow. If you run your business solely by looking at your checking account balance, you’re making a critical mistake. A checking account balance represents the past and present. In order to successfully manage cash flow you need to deal with the future. You need to know how much money you’re going to collect and how much you’re going to spend. That’s the essence of projecting cash flow. In addition, a cash flow projection shows you where the money is “tied up” in your business.

3. Ratio Analysis - If you’re not financial ratio savvy, you’re not alone! Many smaller business owners aren’t. But then again many smaller business owners aren’t as successful as they should be!. The fact is, knowledge of even just a few key ratios goes a long way in increasing your ability to analyze and understand your company’s financial position. As I explain in Gold Mine Tactics: The Business Owner's Success Manual, ratios allow you to see things that would otherwise be hidden from the naked eye. The information suggested by financial ratios can help you to improve results, especially profitability. By analyzing changes and trends over time, ratios allow you to pinpoint and improve specific problem areas. They do a much better job of isolating these areas than do the basic set of financial statements alone. In addition, a ratio becomes an even more powerful tool if you compare it to the ratios of other companies in the same industry (see the next item, Trend Analysis).

4. Trend Analysis - Now let’s take ratio analysis one-step further. Even though ratios are excellent financial management tools, they’re limited because they ignore the time dimension. Success (or failure) tends to be something that happens over a period of time, not in one or two moments. Since ratios are snapshots at one point in time, they may not, by themselves, be able to detect trends or patterns. As I just mentioned, ratios are even more powerful when compared and analyzed over time in order to derive meaningful results. That’s where trend analysis comes into play. Trend analysis happens to be one of my all time favorite management tools. It’s cost effective and easy to learn. It can help you to spot either emerging opportunities or impending difficulties. There’s no doubt that you need to stay on top of trends in order to build a gold mine business. Trend analysis is simply taking a look at financial and other data, including ratios, and trying to recognize or interpret patterns. In addition, trends can be compared to industry averages, or used in the development of company budgets and forecasts.

5. Forecasts, Projections & Budgets - Forecasts, projections and budgets are reports designed to help you compare anticipated future events with actual results. They are indispensable financial management tools. A budget, for example, can tell you a whole host of things like how many employees you can afford or how much money can be spent on advertising and promotions. Unfortunately, so few smaller businesses actually utilize one on a regular basis. Forecasts and projections show how your business will turn out under various assumptions. This analysis is critical if you want to grow. For example, a projection can be used to measure a company’s expected financial position once it gets required financing. A budget is very similar to a forecast or projection in that it also involves predicting the future. A budget will help you to understand why some of your plans didn’t turn out as expected. This is because once a budget is prepared it can be compared to actual results to determine variances. These variances can be investigated and scrutinized. A budget can also be used to help you control costs and manage resources.

6. Break-Even Analysis - Break-even analysis is where you determine the point of activity (sales volume) where total revenues and total expenses are equal. In other words, the break-even point shows you the minimum amount of sales you need to cover your expenses. Do you know your break-even levels? This tool is a MUST when launching a new product or service or when adjusting prices.

The business owner who understands these tools and reports and uses them to analyze the past and anticipate the future is practicing sound financial management thereby increasing the likelihood of success.

In Gold Mine Tactics: The Business Owner's Success Manual I explain each of these tools and reports in detail and then show you how use them to make intelligent and timely business decisions. To learn how this one-of-a-kind manual can help you to expand your business, click here.