There are three topics I always cover with new small-business clients:
- What do you want? (coupled with the 'why')
- Non-negotiables: what are your limits?
- Financial familiarity and frequency
I covered the first two in earlier posts, and here's the third. You may be thinking that financial talk is likely to be tedious. It may not initially seem exciting or fun.
To pique your interest: Leonardo da Vinci makes a peripheral appearance later, and a little-known secret of forensic accountants. There's also an analogy to driving at night.
The work outlined in this advice seem tedious initially, and will require an investment of time and attention. As your business starts to take off, it'll become the single most exciting and liberating thing you can do as a business owner and entrepreneur: you'll be able to see where you're going.
Get to know your numbers. At a minimum, review ALL your expenses and income once a week (an inconvenient but obvious corollary is the need to actually enter the data at least every week, without delay). Some businesses should do this daily. As a small business, cash flow is your lifeblood, and the financial reports (Profit & Loss, Cash Flow, and for some, Balance Sheet) are the way you monitor the pulse of that critical flow. If you already have some familiarity with this, at a minimum you'll save time and money when working with any type of professional business adviser.
If you're not monitoring your numbers, no-one is in the driver's seat (or someone else is driving). Here's the analogy: if you're driving at night, and your car takes 130 feet to go from 60 MPH to a full stop, hopefully your headlights illuminate at least 130 feet of road in front of you, otherwise - despite the false comfort of seeing something lit up in front of your car - you're quite literally driving blind. Put another way, the accident has already happened: it's too late and you're merely a spectator, not a driver.
Think of your financial reports as headlights, and the frequency of data entry as the stopping power of your brakes. If you're reviewing your reports a month after the fact, that's a month's opportunity you've lost to either correct a mistake or take advantage of a trend. You're a spectator. Having delayed data entry, or reviewing reports infrequently, gives you a false impression of visibility: the accident has already happened.
Most people, including business owners, are not born with the natural ability to read a P&L. For most of us, it takes time and familiarity to learn which are the numbers & features of the P&L that need close attention. Give it the proper attention, and a 12-month Profit & Loss report will look like a map, or a painting. Your financial data, properly presented, tells a story. Why? Because of early Islamic mathematicians and Leonardo da Vinci's religious friend.
Beginning as early as the 7th century, and reaching an early denouement in the writings of a Franciscan friar and collaborator of Leonardo da Vinci, double-entry bookkeeping (I'll leave it to Wikipedia for the concise explanation) was developed to guarantee no inadvertent errors in data entry. The P&L or cash flow statement you review is a result of this system. If your books have been well-structured, can quickly show you the most important states and trends in your business.
If you're still reading, here's the secret that experienced financial managers and forensic accountants know well: the numbers always tell the truth, even if they're wrong. In proper business accounting, mistakes become obvious (a side-benefit is that intentional mistakes leave more evidence of their commission).
It's all useful information in the right hands, and you should have at least enough familiarity to identify something unusual or something missing. Don't be the last one to know, or a morbidly fascinated spectator at the car-wreck of your own unattended finances: confidently accelerate through the curves on your path.