You have been in business for 5 years and you feel pretty good. You have some money in the bank and have a net profit most months. You still have a lot of loans but everyone does. Your accountant suggests you look into how you stand against the industry to see how you are really doing. You go to your public library and pull industry data from a bench-marking study against your industry peer group and you are about 10% better that the average.
So what is wrong with this picture? Well multiple things. Let’s start with what average means. The US government has released statistics that 80% of small businesses fail within the first 7 years. One of the main reasons businesses fail is because they run out of money. If a business is making money why would it ever close? So with a little back of the napkin math, only the top 20% are making it. That top 20% is 30 percentage points higher than the average 50%, so being average or a little better is not where any business should be.
The second problem with this company’s situation is they are using only net profit and cash as a key indicator of success. That can be a big mistake. Net profits only measures Sales minus Costs of Goods Sold minus all Expenses. In many business sales are not a cash event. They simply state that an order was filled for the customer. If the customer delays payment there is a delay in incoming cash and your real cash is negative. Managing a business financially is more complicated than just watching Net Profit. A smart business owner will use all their financial statements to manage and benchmark how they are doing.
The bottom line is that today, average is just not good enough. Actually it is far short of where a company needs to be to make it in these challenging economic times. In regards to financials, it is paramount that a company manages all their financial statements. These financial statements are the Income Statement, Balance Sheet, and Cash Flow Statement.
The financial statements need to be used together to find hidden opportunities in your business to come out on top of your industry. There are many key ratios that can be used to provide the owner’s benchmarks on their performance. The business owner needs to work on their financials often and do a complete financial statement review once a month. Though the company’s lenders or stakeholders may not want to see the financials that often, a business owner needs to work on them every day so when the lenders and stakeholders see those quarterly or annual financial statements, they can be proud of how the company is preforming financially.
A business owner must get some rudimentary training on how to read and use their financial statements. Just having a bookkeeper enter a company’s financials into a financial program so taxes can be done is just not good enough. Not only is Uncle Sam interested in getting the money, but the competition wants to put its competitors out of business.
Please do not be discouraged, there is a lot of help. There are classes and computer tools that can help a non-financially savvy owner get up to speed enough to help find all their hidden cash and opportunities. If you are one of these owners or executives in a company that may be struggling go get help, take a look at FinancialSoft’s products that make analysis of your financial statements (an identifying opportunities to realize more cash from your business) easy.