Focus On The Financial Fundamentals
This is the first article in a series dealing with operating your business better this year, and this one is on business finance.
Regardless of the size of your business, the responsibility for operating with solid financial fundamentals rests with the CEO. If you own a small business, that's you.
Research by the U.S. Small Business Administration indicates that more than half of small businesses fail within the first four years. Whether you're in your first four years of business or not, let's make sure you're not part of the SBA's failure statistics. In order to do that, let's get you focusing on the following critical financial fundamentals that every successful small business MUST practice.
- Learn about the importance of producing regular (at least quarterly) and accurate financial statements (balance sheet and profit-and-loss).
- Hire at least a part-time accountant, and/or engage the services of an accounting firm. Too expensive? Compare this to the cost of failure.
- If you're still not ready for an accountant, use one of the easy-to-use financial management software programs.
- Learn how to track sales-to-expense ratios each month in order to know when to adjust spending.
- Understand how to monitor inventory levels with regard to projected sales, receivables and cash.
- Learn how to calculate Accounts Receivable days and Accounts Payable days, and understand their relationship to each other, plus the impact of that relationship on cash flow and working capital. If your company is experiencing rapid growth, disregard this fundamental at your peril.
- Develop a long-term capitalization strategy that blends retained earnings with both short and long-term bank debt.
- Track critical financial ratios that are revealed by your financial statements and their relationship to each other.
- If you're not profitable, learn how to identify the top three financial indicators that point to impediments to profitability.
And finally, arguably the most important financial fundamental:
Develop a complete understanding of the difference between cash and accounting.
If you will pay attention to these financial fundamentals, your chances of not only staying out of the SBA's business obituaries, but also having outrageous small business success, will increase exponentially.
And if you're one of the more mature small businesses, but aren't practicing these fundamentals, hopefully the cold sweat popping out on your forehead right now will motivate you to kick your financial education into high gear.
Write this on a rock... Even if you hire someone to manage the financial part of your business, you cannot delegate the ultimate responsibility for your business' financial performance; that belongs to you -- 100%.
Jim Blasingame
Small Business Expert and host of The Small Business Advocate Show
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