Whatever your definition of success, money is required to be successful. If success to you is living on the beach than you need a lot less a month than someone whose definition of success is living in a penthouse in New York City.
Money is best generated through a successful business. In this chapter you will learn how to understand the financial segment of your business. Don’t skip this chapter. It’s written in understandable English rather than accounting babble. The goal is to decipher your financial statements every month. When you understand what your financial statements are telling you, then you can make good business decisions that help you get and stay profitable and generate the money you need to be successful.
Your financial statements answer these questions:
1. Are your customers costing you more money than they generate in sales? If your customers cost you more than they generate in sales, you don’t need those customers. The only way you find out if you have profitable customers is to track their revenues costs, and when they pay their bills.
2. Are your products and services profitable?
Receiving and analyzing a financial statement each month answers this question.
3. Are you running out of cash? Do you have enough cashflow to pay your bills?
The trends on your balance sheet answer this question.
4. Are your employees productive?
The trends on your profit and loss statement answer this question.
5. Do you have too much debt or are you increasing your debt load?
The trends on your balance sheet answer this question.
~Novel Serialisation: Heavens Fire~
Financial statements are actually easy. They were developed about 1,000 years ago by the Venetian monks who had to keep track of the rich Italians’ money. They had to make it simple. There were no adding machines, calculators, or computers. We have it so much easier today! You’ll discover that financial statements are no more than addition and subtraction. You can use a calculator and a computer software program to help you.
If your experience is similar to that of most of my clients, the first few months of financial reviews are harder because you have to “look up” the analysis terms. However, each month’s review becomes faster and easier. Within six months the analysis is quick and you start wondering why you ever thought financial statement reviews were hard.
Make sure your accounting is on an accrual basis.
Many CPA’s report company taxes on a cash basis. Sometimes there are tax advantages for doing so. However, your operating financial statements, the statements you use to guide your daily business operations, should be set up on an accrual basis.
In cash basis accounting, you record a sale when you receive payment for that sale. You record an expense when you write the check to pay that expense. There are no accounts receivable, accounts payable or inventory on your financial statements. Your revenues don’t match your costs.
In accrual based accounting, an expense is recorded even if the bill isn’t paid. You know what bills need to be paid. You know what revenue should be coming in the door. You have accounts receivable, accounts payable, and inventory. You can match revenues with costs. You’ll know each month, assuming your information is accurate, whether your company is really profitable.
Get your financial statements on time.
You must receive timely financial statements, an accurate balance sheet and profit and loss statement. That means they are in your hands by the 10th of the following month. January’s statements are due by February 10th. Getting January’s statements in April doesn’t help you. Any minor issue that could have been caught and corrected in February may have caused a crisis by April.
Balance Sheets – the fundamental building block of your business.
Why is a balance sheet fundamental? It tells the story of your company from the time you started it until the day you close the doors (or sell it).
A balance sheet is simply a snapshot of the health of your business at a point in time. It shows the true profitability of your company over a long period of time. Your profit and loss statement only states profit or loss – not profitability, ie sustained profits….
This is a sample from a chapter in the book, Your Success. Available from Amazon.
