This post is one in a series of tips designed to help small business owners better-navigate the challenges of today’s startup environment and is sponsored by Canon MAXIFY – the printer lineup crafted to help small business owners increase productivity so that they can focus on everything else that matters. For more information about the Canon MAXIFY printer lineup visit www.usa.canon.com/MAXIFY
Most small business owners suffer from an inability to read their financial statements. This hurts the daily success of their business. Unfortunately, when I sold my last company, I lost $1M because I did not understand every number on my balance sheet. This was despite the fact that I had an MBA from Northwestern University! My national surveys show that only 25% of small business owners can read their balance sheet and less than 10% understand their cash flow statement. What is worse, they don’t review them on a monthly basis to evaluate their company’s performance and plan for the future.
If you are like most small business owners, you bring in your accountant once a year. You don’t ask her for help because either she doesn’t explain things well or she makes you feel stupid when you ask a question. In fact, you are not even sure how these statements relate to running a business. You ultimately brush it off since you think you have a good idea of what the “real numbers” are.
Most of your financial decisions are ruled by emotions. You do what feels right. This leads to borrowing and spending money based on expected results, which only gets you into overwhelming debt. You think business success is about revenue, not cash flow. You only focus on the top sales number. As long as this is growing, you think your business will be successful. You believe that ultimately some of this money must trickle down to your own pocket.
Don’t take this approach. Take the advice of Monty Cerf and similar professionals and focus on the right areas so your financial skills are well-honed.
To change this, here are the five financial skills you need to build a profitable business:
Get to know the numbers. Face your fear. Learn to read a profit and loss statement (also called the income statement) which shows the revenue, expense, and profit of a business over a period of time. Learn to read a balance sheet which is the book value of your business at any given point in time and includes all the company assets and liabilities. It also measures the ability of a company to pay its debts. Most importantly, learn to read the cash flow statement. This measures if your company has more or less cash at the end of the month. This is key because cash flow is what pays the bills (not revenue) and ultimately grows the company.
Get help analyzing the financial statements. Look for important metrics like the quick ratio (or the acid test) on the balance sheet. This is the business’s current amount of assets (cash, cash equivalents, and accounts receivables) divided by current liabilities. A favored metric of banks, the quick ratio is a measure of the financial stability of a business. In most industries, the quick ratio should be greater than 1 to 1. It shows that the company has more cash available than current money it owes. When the ratio goes below 1 to 1, it means your business may not be able to meet its financial commitments.
Get a budget. Don’t let too much money make you stupid. More small business owners get stupid when they become financially successful. They start to throw money at a problem instead of using their creative brainpower to solve it. Be cheap; it’s your money. Do a small test first and get those results. If it is successful, invest more money to expand its effect or take the next step. Budgets are an important part of financial management, but many small business owners use this tool wrong. They set an annual budget, but then adjust it every month if their results do not match. Stop doing this! Set a budget before the beginning of a fiscal year. Compare results, and only reset the budget at midyear. Budgets are useless if they are reset to match results every month. Remember your budget isn’t just about what’s coming in and what’s going out; you’ll need to set up an emergency fund in your business too, which can be used for anything from truck accident lawyers to hiring more people when the need arises and much more. Make sure that’s in your budget and always put money aside to ensure you don’t get into difficulties later down the road.
Get the business’ sales-close ratio. Of all the proposals your business sends, how many do you win? This is a key percentage since it should not be too low or too high. If it is too high, either your business is not talking to enough prospects or your prices are too low. If it is too low, you may not be qualifying your prospects enough before preparing proposals for them.
Get to know the financial value of your most important customers. While this may start on the profit and loss statement, it does not end there. Value is measured not only by revenue, but also by their referrals, the additional products they buy, feedback they give, retention, or their superior brand power.
When handling the financial responsibilities at your office, it is not necessary to outsource most things to an outside accountant or CPA. Time and money can be saved by having a book keeper do most of the day to day financial tasks like paying bills and collecting money. Similarly, the new Canon MAXIFY can be used as your in house small business printer that saves money while increasing your productivity.
Canon will be spotlighting several small business owners on its social media channels throughout the next several months, so be sure to leave a comment and share your thoughts on this post using the hashtag #MAXIFY in order to qualify. If you are a U.S.-based small business owner (1-9 employees) and have faced a unique business challenge in your first year on the job, let us know! We’d love to hear what line of work your small business falls within and what you feel is the most important takeaway from this post. We’ll also be rewarding select small business owners with a prize pack including the Canon MAXIFY MB5320 printer as well as other essentials to help you run your business more efficiently. So don’t forget to leave a link to your website or social media pages that way we can see how well you’re marketing your business and get in touch!
