Imagine if you can a professional golfer who does not really understand the games scoring system so always relies on the caddy to fill out the score card. Or a professional snooker player who never bothers to count the score during the game instead relies upon the score board but unfortunately doesn't really understand all the terminology or figures that display on it. Or the professional Darts player who never forecasts ahead winning number combinations, instead just waits till the referee shouts last chance on double 1 or your bust... It's unthinkable isn't it? It just wouldn't happen because they are professionals and after all it's their lively hoods and ultimate success at stake if they don't know these things.

So here is an even crazier scenario; imagine if you can a professional business owner that doesn't know their own numbers except those that the hired caddy, sorry accountant tells them and only ever looks at the bottom line of the score card, sorry P&L, who doesn't really understand the terminology or all the figures on their business score board, sorry Balance Sheet, and never forecasts ahead their winning numbers using a cash flow forecast, instead always makes uncalculated decisions trying to avoid going bust...

In the Game of business you must know your numbers to gain mastery and control of your business and allow you to make informed decisions instead of the GUT feeling (Gave Up Thinking) decisions that some of you may currently make.

Let me start off by saying to the dozen or so accountants who subscribe and read my action tips regularly that caddying is an honourable and highly skilled profession, so don't be too upset with my analogy:-) Let me also state that I am not an accountant and nor do you need to be to understand your business financials. Learning them will lead to a stronger, leveraged relationships with your accountant...   

Lets blow the myths on the 3 critical financial controls that as business owners we must know, use and understand... Yip I said 3:

The Balance Sheet,  (the least understood).

The Income Statement or P&L, (the least analysed).

The Cash Flow Statement, (the least used).

Think of the Balance sheet as a snapshot from the last scene of a movie, it tells us how that particular movie ends so in reality it's a snapshot of our business and tells us much cash retained or earnings we have at that time. In relation, the P&L statement is like the motion picture and when watched tells us the story of how we got to the end scene; the Balance Sheet. Think of the bottom line (operating or net profit) of your P&L statement as one of the critical scenes in the movie and then ask yourself; to truly understand a movie and realise the entertainment value it gave would you simply watch a critical scene and the last scene... No of course not so why do that with your business? In relation, think of the cash flow statement as the editors story board and schedule for the actors in the movie. You could not efficiently manage the movie without it, and the great thing about it is that you can use the same storyboard to plan the movie sequel or in reality you're your cash flow projections for the next year.  Let's look at them in a bit more detail...

The Balance Sheet

Every single financial occurrence in the business affects the balance sheet. I am tempted to abbreviate it to BS because in my experience that's what many business owners think when they read it... So in laymen's terms, a Balance Sheet illustrates how the things and stuff in your business are balanced between what you owe and what you own. Things and Stuff are called Assets. What we Owe are called Liabilities and what we Own are called Equity...

ð  Things & Stuff = What we Owe + What we Own.

ð  Assets = Liabilities + Equity. (the language of business - learn it)

ð  A=L+E

ð  The Assets figure must be equal to (Balance) with the liability figure added to the equity figure.

The balance sheet is designed to tell you how much of the things and stuff (Assets) in our business do we Owe (Liabilities) or Own (Equity). It is a critical diagnostic snapshot in time tool to understand how healthy your business is. 

 The Income (or P&L) Statement & The Cash Flow Statement.

The P&L tells us how efficient we are at turning revenue (sales) into profit, i.e. controlling expenses. Typically when handed financials we firstly or only look at the P&L bottom line, which is net profit or earnings. If it looks good; we have a drink. If it looks bad; we have a bigger drink! The truth is: the P&L is theory! You cannot pay for something with promised earnings only with hard cash.

All business transactions come in two parts:

   1. The Promise (to deliver something of value to the customer with the customer agreeing to pay a certain amount for that value)

   2. The Settlement (delivery of the value to the customer and payment)

The P&L records the promise and the Cash Flow statement records the settlement.... Which is really where the saying 'Cash is King' comes from... We can be profitable, but still run out of cash and die. That is why Cash Flow Statements are so vital for business control and decision making, especially for forward looking projections... Unfortunately they are neglected by many business owners....

Our job as a business owners is to buy assets as effectively as possible, use those assets to maximise sales (revenue), control expenses to maximise profits, and turn those profits into cash. The P&L allows us to see if the sales of the business exceed all of the costs of doing business, (Break Even). It is a great tool for trending and controlling costs, and creating budgets in order to assure profitability of the business. 

Recent statistics tell us that only 60% of business owners get financial statements from their accountants, and less than 5% understand them...

If you would like to achieve Financial Mastery in your business then REGISTER ONLINE for our Understanding Finance Workshop on Friday March 18th at Glasgow City Halls, Glasgow. 

8:30am Registration, workshop 9am Start to 12pm

Followed by buffet lunch + Networking Finishing 1pm

This is a Sponsored event with limited FREE spaces so register now to avoid disappointment.

List of 2011 Business Development Workshops