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
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:
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.
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.
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).
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.
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.
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.
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you'd like more information or would like to discuss this
article personally with me, please write to
me at alex@goldminetactics.com
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below for author information.
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