By Ross Anderson
Business is a numbers game.
It is essential to know your numbers so that you can maintain focus and have visibility on what is going on in your business. There are three elements that every business owner should understand; the Profit & Loss Statement, the Balance Sheet and the Cash Flow Forecast.
Are your numbers up to date?
If your numbers are current, you will know where you are at in your business.
Using your numbers with the 3 key elements. You can understand the necessary things about your business’s financial health. You will be able to tell if your sales income is on track. Whether your costs are under control. And how successful your business is financially at any moment in time.
If your numbers are not up to date, it is if as though you are running your business blind. Imagine driving a car with a blindfold around your eyes. You definitely should not be doing that; this applies to your business too.
Your visibility on your business is firstly through your financial numbers, so you need to ensure that they are up to date. It is only when they are up to date that you will be able to manage your business effectively. For example:
- You will know if your sales income is reasonable and enough to achieve the profit you want.
- You will know where things are at with your variable costs; if you are paying your suppliers too much.
- You will know if your overhead costs are under reasonable control.
- Most importantly You will know where your profit is at; an ultimate indicator if you are doing well in your business.
So, let’s look at each of the three elements and understand what they are and how they work together.
Element 1 – Your Profit and Loss statement is like a scorecard. Your profit and loss is like a lap board if you’re in a race car, it shows you how fast you went at the end of each lap. Did you know that you can actually be showing a profit on your Profit and Loss statement and have no money in the bank? Companies have gone broke showing a profit on their Profit and Loss statement.
Element 2 – Your Cash Flow Forecast is like the fuel in your engine. It shows you how much fuel you have in your tank, or in other words, how much money you have in the bank. It also shows you how much fuel (money) you can expect to have in the next 30, 60 or 90 days. If you are on top of your cash flow forecast, you won’t run out of money unexpectedly.
Element 3 – The Balance Sheet is like your scorecard for the entire year. It shows you the financial health of your business. This is hardly used. But it is still important because it shows you what your retained earnings are and what your equity is. So, what exactly is equity? Equity is all your assets minus all your liabilities. The bigger your equity, the healthier your business is!
I can’t stress enough how important it is to know all three parts to your financial numbers. If you don’t have a good grasp of your Profit & Loss Statement, Cash Flow Statement and Balance Sheet and how they correlate, it is vital that you speak to someone who can explain it to you in simple terms.
If you would like to make an appointment with a facilitator to discuss the 3 elements further, please call 1300 249 482 or email info@businesshq.org.au.