Not a money person? You’re not alone. Many small business owners are not money people. And there is nothing wrong with being a great idea person or adept at business development. However, thinking that just paying attention to your “cash in, cash out” is the only information you need means you are missing a great deal more information.
In previous posts about living business plans here , here and here, I’ve written about the importance of having a living document and designing it so you use it on a quarterly basis. It’s great to have well written goals that keep you in action and being clear about what you want to accomplish is crucial. But, at the end of the day, how do you know if what you’re doing is working? How do you know if you’re making money? It’s all in the financial reports.
The 3 most important reports
1. The Balance Sheet is like a snapshot of your small to mid-sized business (SME) for a given moment in time. It details the company’s assets, liabilities and net worth.
Now, before you let your eyes glaze over and shut off your brain, let’s take a closer look. It is highly recommended that you read more about these definitions at AllBusiness.com (highly recommended site) as this post is using just the basic definitions for brevity.
Asset: an economic resource that is expected to provide benefits to a business. A few examples of this include real estate, cash, inventory, machinery or a patent. There are also sub-categories that may be important to understand if you are planning to speak with investors or a banker. In your living business plan, it is important to know what your business owns that carries a tangible or intangible value.
Liability: a debt or financial obligation. A few examples of this are money owed to vendors, estimated tax payments or loan payments. For those of you who offer a money-back guarantee or warranty, this may also be a liability.
Net Worth: total assets less your total liabilities. This is also sometimes referred to as retained earnings. Imagine it like a simple math problem Assets – Liabilities = Net Worth
If you aren’t using accounting software or have an accountant creating this document for you, you can find a good template here to get you started. Seeing it all lined up in categories and numbers can help you see the overall picture of what your small business is doing right now.
2. The Profit and Loss Statement is another sort of picture of the health of your SME. Simply put, it lists how much revenue (money coming in) is being generated and your expenses (money going out) during a set period of time. This can be done monthly, quarterly, biannually or yearly. Other terms that mean the same thing are income statement or operating statement. This report cuts to the chase. Are you making a profit or posting loss after loss? If you find your business is consistently losing money, it may be time to revisit other parts of your business plan or consider an exit strategy (closing the business, selling it or hiring someone with better skills to run it).
3. The Cash Flow Statement reports revenue and income as well as expenses derived from selling services or products, investing in long term measures for the growth of the company and borrowing and/or selling common stock. This report really highlights the solvency of your business by showing how easily financial obligations can be met.
You can be a “money person” some of the time
You may not become totally enamoured with all kinds of financial reports but you can discover how useful they are as tools. There are moments that you will discover good or bad news. I remember one time in the early days of my business when I was sure things were going south. I was pleasantly surprised to discover that the cash flow was healthy and trending upward. There is plenty to lose sleep over. Knowing what is going on financially will help you sleep better and make proactive decisions.
*Want to learn more about living business plans? Join me for a 2-hour interactive Business Planning Workshop on Monday, October 17, 2011 from 6:00pm to 8:00pm at the Lowell Small Business Assistance Center, 88 Middle Street, Room 202, Lowell
- Revisit their vision, core values, and core purpose to make sure they are on track
- Learn simple methods to analyze and measure how their business is progressing so you can make course corrections before it’s too late
- Fine tune their current goals and map out steps so they stay focused on what their customers really want and stop wasting time
During the workshop, there will be written exercises using information from case studies and the participants’ own businesses. At the end of the workshop, participants will leave with a written version of their living business plan. To learn more about the Lowell Small Business Assistance Center, you visit their website or call (978) 322-8400.