Fundamental Financials
This is the first article in a series dealing with operating your business. This one is about financial fundamentals.
Regardless of how big or small a business is, ultimate responsibility for operating with sound financial fundamentals rests with the CEO.
In a small business, that’s usually the owner.
Clearly, business failures could be significantly reduced if, before a business opened, the owner was required to pass a course on financial fundamentals. Part of that course might include the following essay questions.
- Outline the importance of producing regular (at least quarterly) financial statements (balance sheets and profit-and-loss). Include all the dangers of not having regular statements.
- Identify the various financial management software programs that are available today. Include examples of how easy these programs are to use, even if the user has limited accounting background.
- Document the cost of hiring at least a part-time accountant, and/or engaging the services of an accounting firm, to help you manage your numbers. Then compare and contrast this expense with the cost of total business failure.
- Explain how you would track sales-to-expense ratios each month so you know when to adjust spending.
- Detail how you would monitor inventory levels with regard to projected sales, receivables and cash.
- Compare and contrast your accounts receivable days and accounts payable days. Include your understanding of their relationship to each other, and that relationship’s impact on your cash requirements.
- Develop a long-term retained earnings strategy for working capital that is augmented by a bank loan strategy.
- Outline at least 10 critical areas of financial management that you can perform by understanding the relationship between the profit-and-loss statement and the balance sheet, as well as the difference between cash flow and accounting.
- Congratulations, your business has an increase in sales. Explain where you should anticipate a possible negative impact as a result of that sales growth.
- If you bottom line shows a loss, identify the top three areas on your financial statements where you could find the impediment to profitability.
OK, I know you don’t like essay questions. But if you can answer these questions and practice those answers as you operate your business, your chances of achieving operating excellence in your business, and financial success, increase significantly.
Here’s some tough love: Don’t start a business unless you can answer these questions. And if you already own a business, 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 have employees to manage the financial duties, the ultimate responsibility for your business’ financial performance is yours!
Jim Blasingame
Small Business Expert and host of The Small Business Advocate Show
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