Consider this: If business is a sport, what is the scoreboard? Your financial statements, to be exact. The question is, how do you know the scores if you can't read the scoreboard? How can you tell who is winning and who is losing if you don't know the score?
Imagine boarding an aeroplane and the pilot greeting you at the door while looking into the cockpit and exclaiming, "Wow, look at all those dials!" What would you do in this situation? You'd most likely refuse to board the plane!
It is the same with your company.
How can you effectively lead your employees if you can't read your own numbers? How does this affect your decision-making?
Accounting is a business language. For better or worse, not all of us are CPAs, and we don't all speak accounting jargon. Unfortunately, most accountants speak gibberish to us. As a result, many business owners fear numbers and accounting.
This isn't about turning you into an accountant; it's about helping you understand business language and then using it AS A BUSINESS OWNER to make better business decisions.
In this blog, we will look at three scoreboards: the Balance Sheet, Profit and Loss Statement, and Cash Flow Statement. A balance sheet is a snapshot of your company's financial situation. It is a snapshot of your company's current state. The things and stuff that you have in your business are on the left.
What are some examples of things you have in your business?
Because the top items are liquid, they must be consumed within 12 months. The bottom things are difficult to liquidate in a year. Our possessions are purchased with money we either owe or own.
Let us start with what you owe. In business, who would you owe money to? Examine your possessions now. What do you own in the company? The trick now is that the left must balance the right, which makes sense because whatever you have must have come from what you own or owe, and nowhere else. These are known as assets, liabilities, and equity.
Profit & Loss is a report that tells you how much profit you EXPECT to make. It's as simple as that: your sales minus your expenses equals your profit. Where do people typically turn when they receive this report? At the bottom line, that is all there is to it. So, if the bottom line is good, they go out and have a drink, and if the bottom line is poor, they go out and have a drink. Hence, nobody bothers to consider what's going on above the bottom line while everyone is out having a good time. Consider that for a moment. Is there a difference between a company with red figures and one with green ones? Yes, of course.
Yet, keep in mind that a P&L is a report of the profit you are SUPPOSED to make. Let's think about the P&L report's genuine significance. It displays your net earnings or loss over a period of time. You should at the very least review your profit and loss statement each month and compare the trends in your income and expenses month to month. It's crucial to compare your percentage differences year over year so you have a standard to refer to. You can compare your company to others in your industry by setting an annual benchmark. This will give you the opportunity to change things like your marketing and sales tactics and seek cost-cutting measures. The goal is to increase that all-important number, your bottom-line profit. Furthermore, by analysing your net profit over time, you will be better able to budget for future profitability and expansion opportunities.
The Cashflow report serves as the final scoreboard. There are three types of cash flow: operating (what you make from running your operations... a sign of how efficient your operations are), investment (how much money you invest in assets), and financing (how much of other people's money you use to run your business).
Many businesses get into trouble by failing to separate these. Each type of cash flow can be negative or positive. If you have sales, you have a positive operating cash flow; if you pay expenses, you have a negative operating cash flow. Knowing this will assist you in properly recording your cash transactions.
6 Rules for Increasing Cash
1. Reduce assets
2. Increase liabilities/capital
3. Increase revenue
4. Reduce cash expenses
5. Increase Productivity
6. Optimize timing
Now that we have the numbers, many people tend to focus on meeting the numbers and stress when they don't.
Learn to understand and embrace the law of cause and effect. Your numbers are the result of your activities; activities occur as a result of management decisions. So, if you're not getting the results you want, examine your activities and the decisions that drive them. And if you're not satisfied, talk to your boss. Because this is the beginning of the cause, coaching begins with the owner/management.
Remember that accounting is simply the conversion of activities into numbers and back again. That is all there is to it.