Financial Disease #2
In my last blog I introduced the concept of coupling a common known disease with a common financial issue. Last week I discussed Financial Disease #1: Cash Hemorrhaging and the cause and effect it will have on your business.
This week, I will share Financial Disease #2: Financial Ebola. This is an extremely deadly financial disease. Four out of every 10 business that contract Ebola do not survive. The causes of this disease are the absence of financial statements or incorrect or even late financial statements. The symptoms of Financial Ebola is initially business pains, then confusion on profitability, problems with lenders, leading to trouble planning for and paying your bills and eventually the bleeding of cash and missed opportunities.
For the business owner, contracting Financial Ebola is akin to driving a car blindfolded and subjugating yourself to a host of unknown risks. You wouldn’t think about driving your car blindfolded, yet many owners try to manage their business with financial blinders on. Managing your business without knowing where, how or even if you are making money or exactly how much cash you have to spend today, tomorrow or next week will result in unknown issues. Failing to diagnosis and treat Financial Ebola will either put your business in the ditch or worse it will total your business.
Say for example your business seems to be doing fine. You have a number of customers, and your business is having a difficult time just keeping up with orders. Yet, your bank account is either empty or at times overflowing and you are too often having trouble paying your bills. It seems that everything should be fine, but it is not. So what’s wrong? What is happening to all the money coming in? The answer should be in your financial statements. Your financial statements are your friend not your enemy. Understanding them and using them wisely will give you a competitive advantage.
By financial statement, I am referring to these three core statements.
- Balance Sheet – this is a record of your business’s assets, liabilities, and capital, up to a specific point in time.
- Income Statement – this is the summary of your business’s earnings, expenses, and net profit (or loss) over a specific amount of time.
- Cash Flow Statement – this will show the actual inflows and outflows of cash coming into and out of your business.
Having accurate and timely financial statements will not guarantee business success, but they will clearly inform you on how well you are doing or not doing. It is like keeping score and also recording pertinent stats at a sporting event. It tells us first, who is wining and who is losing. Additionally, the stats can help explain the whys. The same is true in business, with accurate financial statements, they can tell you in black and white, where every penny that has come into your business and every penny that has gone back out. Financial statements tell a story.
However, financial statements are only as good as the information that is backing them up. If you do not have complete accounting records, your financial statements will not be reliable. It is extremely important to keep accurate financial records when you run a business. This is important not only for taxing authorities and satisfying lending requirements, but also for your own peace of mind.
Having accurate and timely financial statements is not a luxury it is a necessity. They are your friend and can help you manage better and more importantly – plan better.