Last week I spoke with a business owner who was fed up with the performance of his organization. Although a highly productive individual and decent sized company, he felt that he has been treading water the last three years, not making the strides in improvement he wanted to. He has been sitting on a number of personal financial goals that were not seeing any forward progress. He finally got to the point where he sought outside counsel to help him break through the ceiling that had been holding him back.
In 30 years of consulting with businesses, this is a common problem aired by most business owners. Smart business owners are frustrated because they are not making the progress they want personally. Not making the money they should, not seeing the growth in their business and not seeing their largest personal asset improve in value. There are two primary causes of this, this article is going to speak to the first and next week’s article will deal with the second.
The most common problem business owners have is not understanding and utilizing the key performance indicators that monitor the performance of their business. Not one of you reading this article would take a long trip in your car without looking at the cash gage or viewing the speedometer periodically to pace yourself against the posted speed limit. The best performance indicators of a company are accurate and timely financial statements (profit and loss statements, balance sheet and statement of cash flow). But less than 30% of business owners take advantage of this resource.
Let’s quickly discuss what understanding monthly financial statements will do for the owner of a business:
- It is a report card on the performance of management that everybody outside of the business uses.
- Bank and other lenders place a major portion of their decision making on the performance of the business as stated by the financial statements.
- Vendors and other creditors will rely on financial statements to make key credit decisions.
- Investors will strongly rely on the financial information from the company to determine if they should make the investment or not.
- The government relies on them to assess taxes.
- Purchasers of businesses will rely on financial information to decide if they want to purchase and how much they will spend for the business.
- It is a tool to tell you, as the manager/owner of the business if you are on the right track in attaining your company and personal financial goals and objectives.
Financial statements provide the reference point for you as a manager to guide your company. I believe that accurately prepared financial statements reflect all the activities in the business: employee satisfaction, product quality, on-time delivery, customer satisfaction, and all of the key financial indicators: revenue, margins, profit, cash flow and upside potential.
Most businesses leave thousands of dollars on the table every year in loss profitability because they don’t use financial statements as a management tool.
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