Eleven financial fundamentals every small business CEO must know

Jim Blasingame

Regardless of the size of the business, the ultimate responsibility for success lies with the CEO. If you're a small business owner, that's you. And the most critical CEO tasks that result in success or failure lie in the knowledge and practice of financial management fundamentals.

Recent statistics show that over half of small businesses fail within the first four years. Clearly, that mortality rate could be significantly reduced if, before a business opens, the founder/CEO was required to pass a course that teaches business financial fundamentals and how to operate a business with them.

Don't worry. Your humble advocate would never presume to lump you in with those who need business finance schooling. You, no doubt, are squared away on that score, but perhaps you know a small business CEO who isn't. And let's say you're keen to give that CEO – your "friend" – the maximum opportunity to avoid becoming a marketplace battleground casualty.

If so, here are eleven of the key elements (in no particular order) that you could pass along to your friend as the curriculum outline of that small business survival course. And can encourage him or her to learn more as they become professional, successful, surviving CEOs.

1. Veteran CEOs don't do their own accounting – they've learned how to manage with regular (at least quarterly) financial statements (balance sheet and profit-and-loss) produced by a professional accountant.

2. Successful CEOs know their gross profit margin – both the percentage, for pricing purposes, as well as the actual number that's essential to cover their corporate nut every month. 

3. Smart CEOs track sales-to-expense ratios – so they know what marginal spending to adjust every month, instead of at the end of the year.

4. Savvy CEOs closely monitor inventory levels – matching it to projected sales, receivables and cash.

5. Real CEOs know their Accounts Receivable days and Accounts Payable days – because the relationship between the two has a direct impact on cash management and funding growth.

6. Disciplined CEOs develop a capitalization strategy – using a formula that blends retained earnings with short and long-term capital sources, like bank debt.

7. Capable CEOs use critical financial indicators and ratios – because as students of the balance sheet, they know its relationship with the P&L reveals powerful planning and sustainability metrics.

8. Surviving CEOs prepare for the cruel irony of sales growth – having learned how underfunded sales volume can cause the uninitiated to become a statistic by succeeding themselves out of business (read "5" again).

9. Professional CEOs are profit hawks – from a mile away they can spot and target impediments to profitability, and then deal with them quickly, decisively, and without emotion.

10. Perennially successful CEOs are delegators – but they never let cash management get too far from their fingertips, for what will be needed tomorrow to the next 12 months.

And finally, arguably the most important CEO financial management discipline:

11. World-class CEOs are time experts – they're devoted to tracking Blasingame's Three Clocks of Small Business: The Expense Clock, the Sales Clock, and the Cash Clock, and the existential relationship each one has with the other.

If any of these fundamentals are causing cold sweat to pop out on your forehead right now – because you're worried for your "friend" – perhaps you could help them kick their financial education into high gear and become an expert on these fundamentals, like you.

Write this on a rock ... The ultimate responsibility for a business's financial performance belongs to the CEO – that's your friend. And you, of course.

Jim Blasingame is the author of The 3rd Ingredient, the Journey of Analog Ethics into the World of Digital Fear and Greed.

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