For too many business owners, their financial system consists of them looking at their checking account each day.
I routinely see organizations - even ones with millions in revenue - who fail to regularly prepare and review financial statements. Who don’t have a cash forecast. Who don’t make intentional decisions about how to plan for profitability up front.
At the end of this article, you won’t be one of these business owners.
You will understand why you need financial statements, and how to make sense of them.
You will understand the importance of cash flow and how to plan for it so you aren’t surprised.
You will know have a system for predictable profits.
And you will understand the relationship between your financials and the value of your business.
Let’s get started.
Why you need a financial system
Your financial system will be a key element in gauging health of your company. While there are additional metrics you will incorporate into your business scorecard, ultimately the end result will manifest itself in financial metrics.
In order to manage your system, you need to have the right inputs. You can’t manage what you can’t measure.
Your financial system effectively is just measuring the effectiveness of your operation - it’s a direct reflection of the business you’ve created.
If your financials are poor, it’s because your business is sick. And while it can be difficult to look at them when your business is sick, it can be difficult to improve it. In many cases, business owners neglect their systems and aren’t even aware their business is sick until it’s too late.
You don’t necessarily need to understand everything that goes into creating your financial system - although the more you know, the better you’ll be as an owner. But you at least need to understand the general concepts.
Even if you have an accountant preparing your financial statements, you need to take ownership of them as the owner of the company. The accountant works for you, not the other way around.
The essential components of your financial system
There are a couple primary tools in your financial system:
- Your accounting system - the record of all the revenue and expenses that flow through your company.
- Your financial statements - a set of reports that summarize the details of your accounting system and tell you how profitable you are, list the assets and liabilities in your company, and show you the state of your cash flow.
- A forecast - a forward looking report (informed by historical data, and increasingly accurate over time) that tells you what cash inflows and outflows you can expect over time.
- A valuation - an estimate of what your business is worth at any given time, that tells you how you’re progressing toward accomplishing your business’s 10 year vision and your life vision.
