If you’re an entrepreneur, you’ve likely heard the statistic that twenty percent of businesses fail within 12 months of starting and only 50% make it past their fifth year.1
There are many factors that go into the cause of businesses failing, and plenty of suggestions on where entrepreneurs go wrong. Many studies, including a report from Babson College, show that over half of the businesses that fail are due to a lack of profits or financial funding. Is that surprising? Not really. We see it a lot. Especially since it’s pretty difficult to run a business without some form of money, whether it’s from profits or funding.
What is surprising is the amount of owners who don’t understand why they aren’t profitable.
Too often at the Bank, we hear owners comment that they’ve had a record breaking year in sales, but they can’t understand why they don’t have any cash. Seems a little counter intuitive, right? Actually, it is understandable when you consider most business owner’s origin story. Most owners started their company because they had a passion for what they did, they did it well, and wanted to share that passion with others. While that passion to succeed is a key ingredient in making a business “successful”, too many entrepreneurs miss the other key ingredient – good financial health.
Business owners often miss the mark on this. They think that not understanding their financial statements is “ok” because that is their accountant’s job. This error in judgement is one that can have enormous consequences.
We get it. Finance is boring.
Now, before you tune out thinking “it’s ridiculous that something as minor as understanding your financial statements would bring down your business”, and before you think that this is just a banker lamenting that people should always balance their check book, stay with me… I know most anyone with a heartbeat looks at finances as more boring than snail races, but not understanding how to interpret financial statements is the fatal flaw that too many owners underestimate. That critical skill is foundational to not just surviving in business, but giving your company the opportunity for long-term sustainability and growth.
Being good at sales (or whatever you do) is extremely important, but so is making sure your business is not hemorrhaging all your profits.
Here’s why: the numbers in a balance sheet and income statement tell a story. When you know how to read them properly, they tell more than just how much income was earned. They tell how it was accomplished (product contribution, expense levels, funding, etc.), and they tell what the business is capable of doing (should you use extra income to expand, hire more staff, etc.).
More importantly, they will throw out red flags and warning signs for trouble that is on the horizon. However, way too often, those warning signs aren’t noticed by the untrained eye. Then when they are finally spotted, the problem has grown, making it much harder to make changes in time to save a business.
What’s even better than providing early warning signs of financial trouble, is that to the trained eye, those financial numbers can reveal the path to profitable growth. They guide the owner in making smart decisions for expansion, hiring appropriately, understanding the balance between growth and capital, and so many other key decisions. While reading your balance sheet and income statement correctly is not something a business owner is just going to figure out on their own, it’s not rocket science either. With a little bit of guidance, it’s actually really easy to understand.
So what do you do?
You may be thinking, “well, that’s why I’ve hired an accountant. They’re the professional that will tell me all those things.” Nothing against accountants, they are important, but that isn’t what they do. Most often, accountants look backwards in time. They compile your books at the end of the month and prepare your taxes for the previous year. They are not looking forward to what is on the horizon. Plus, accountants (not all, but most) feel it is not their place to tell you how to run your business. They are experts in bookkeeping or tax service, not as business coaches or consultants.
Besides, after you’ve invested so much of yourself into your company, do you really want to blindly rely on someone else to catch everything going on in your numbers? Would you hand over all responsibility for producing your product to someone without at least checking their work? I seriously doubt it. Expecting your CPA to do all of your long-term financial planning is like handing over the responsibility of producing your product to someone, then never checking to make sure your products are being made to your standards. Your CPA probably does great work, but are you sure their plans for your business would be the same as yours?
Can you effectively and easily determine how much capital it takes to create a new product or expand your services? Do you understand the difference between variable costs and fix costs, and how they correlate? Can you determine how much sales growth you can manage financially?
If you don’t know these answers, or if you’re trying to Google these terms right now, we need to talk. Hopefully you realize that understanding your business financials is essential to running a sustainable company. And no, you don’t have to get a degree in accounting, but you will need to get some training or a refresher on business finance. You’ll want someone who can illustrate these things and be available for questions you have.
Callaway Business Coaching
That’s why we created the Callaway Business Coaching program. It’s a two day seminar that puts these seemingly complicated questions into real world, easy to understand concepts to help you use and apply these strategies to your business. In addition to the two day business finance course, we provide additional support throughout the year to help owners apply the tools learned in the course and increase their profitability. Think of us as an accountability partner/business life coach.
If you’re interested in learning more about the Callaway Business Coaching program go to our website callawaybank.com/businesscoaching or speak with one of our commercial lenders. The next program beings October 25, 2017. We hope to see you there.
- Source: Bureau of Labor Statistics, Business Employment Dynamics.