I see many business owners get into financial trouble when they grow.
Doing these two things helps avoid major catastrophies. If you don’t do these two things, your business will get into trouble.
Click here to listen to my interview with Kevin Price about this topic.
1. Review timely, accurate financial statements each month
None of us, unless we are a bookkeeper or CPA, start a business to do the financial side of business. We start because we see a need, want to satisfy a dream, or a hobby turns into a business.
When your company is small, you can control everything. You know that all of the customer invoices have gone out because you sent them. You know when you get paid because you are the person going to the bank. You know when the supplier bills come in because you get the mail and you write the checks. You don’t pay attention to pricing and profit as long as there is cash in the checking account. You rarely, if ever, print out the company’s financial statements. You don’t need to, you think, since you have a finger on everything that is happening with your business.
Then, the company grows. You can no longer, sell, produce the products and services, and take care of the bookkeeping. You hire people to help you. One of the first people you usually hire is a bookkeeper. You breathe a sigh of relief because you no longer have to deal with the bookkeeping. You hated it and didn’t pay attention to it except at tax time when you handed your CPA your QuickBooks or other accounting information…which wasn’t correct.
If your spouse volunteers to do the bookkeeping and she doesn’t have any bookkeeping background, your spouse needs to go to school and get it. Otherwise, your spouse will muddle through the books, making guesses and mistakes, and producing financial statements which are wrong and cannot be relied on.
Then a cash crunch hits or you get an IRS notice and the arguments begin at home and in the office. I’ve seen too many divorces because a spouse, who had no idea what she was doing, dealt with the books.
Even if you hire a bookkeeper, you cannot abdicate the review of monthly financial statements. Profit or Wealth gives you the overview of how to interpret balance sheets and profit and loss statements. My book, The Courage to be Profitable gives you a detailed financial explanation, in English rather than in accounting babble.
Learning to understand your financial statements will keep you abreast of the financial areas of your business. They help you spot minor issues before they become major crises so you can resolve them before a catastrophe hits and potentially causes bankruptcy.
Financial statements are not rocket science. They are simply understanding a few accounting terms and performing a little addition, subtraction, multiplication and division. Today’s bookkeeping is no
t like the arduous and meticulous ledger books of the 1940’s or like the ancient Chinese who added on an abacus! You can use an accounting software program and a calculator.
You’ve probably done harder things in your life and succeeded. Think about the process that you used to learn the production part of your business or a hobby. It took practice to get it right. You were willing to commit to the practice because you wanted a result.
Commit to the investing 30 minutes a month on your financial statements. Within a few months you will be understanding them with ease and wonder why you ever thought they were so hard.
If you don’t pay attention to the financial side of your company, it’s not “if” your company will get in trouble, it’s “when” your company will get in trouble.
2. Report Accurate inventory on the Company’s balance sheet each month
For those companies who have no inventory, this section does not apply to your company. For those companies who do have inventory, it is critical to know how much the company has at all times because inventory is a bet.
I have seen too many balance sheets with no inventory or the same inventory value each month. If your company uses inventory to produce products and services, it changes on a monthly basis because your sales change on a monthly basis.
If there is no inventory or the same inventory value on your company’s balance sheet, then your profit and loss statement shows less profit that it should. Why? Because all material purchased are expensed as cost of good sold. Some of those materials are actually not a part of cost of goods sold because they are sitting on a shelf or in an employee’s truck. The only time a part should be accounted for in cost of goods sold is when it is used to produce a product or a service.
Putting inventory on your balance sheet and properly accounting for it is painful at first, especially if your company has grown to a $1,000,000 or more in revenues. Many accounting software programs can help you track inventory properly. In addition, bar coding has made it easier to account for materials going in to your company and being used to produce products and services.