When it comes to financial management, it’s the same story whether you own and manage your own business, or if you are in a position of authority or responsibility in a club or community organisation. Business owners, managers, board members or committee members have to develop at least basic skills in financial management. Expecting others in the organisation to assume responsibility for the finances is asking for trouble, particularly if it’s your business or if you can be held responsible in some way.
As with the other topics we have discussed, being a great entrepreneur or highly-skilled trades-person does not necessarily make you an excellent manager of employees or owner of a business. Financial management is another example of something that doesn’t happen overnight through ‘pillow osmosis’, nor do the skills come automatically when you purchase or start-up a new business. The best solution is not to simply employ someone or rely on someone who’s “good with numbers”. It’s your business and your responsibility and you need to know what’s going on!
Too often in our line of work we come across businesses where the owner only looks at the financials because the bank manager won’t approve the $100,000 loan to buy the new machine desperately needed for the workshop without them or, because creditors are ringing up demanding to know why the invoice they sent you 3 months ago hasn’t been paid. Quite often it’s too late then and can be embarrassing, frustrating and time-consuming.
If you currently have a book-keeper who takes care of the cash management and financial side of the business, spend some time with them to see how things are done and hopefully, gain a better understanding of this crucial part of the business. You don’t have to know every ledger entry, bank fee and paper-clip that’s purchased, but you do need to have an overall picture of the financial health or otherwise of your business.
To oversee your business effectively, you need to know; where your money comes from (Revenue); where your money goes to (Expenses); what you own (Assets); and what you owe (Liabilities). You also need to understand the basic financial reports and how to read them – Profit and Loss Statements, which tell you how your organisation is performing financially – Revenue minus Expenses equal Profit. You also need to be able to produce or more importantly, read a Balance Sheet, to see the current financial position of your organisation – Capital equals Assets minus Liabilities. You should also go on to learn how to prepare and read Budget Statements for your business so you can adequately plan for the future of your organisation; and Cashflow Statements so you know that you have adequate cash coming into the business to pay your bills. Knowing how to generate, read and analyse these statements will assist you enormously in understanding the financial condition of your business.
When starting up a business (or even revamping your existing business), you should find yourself an accounting or book-keeping system which suits your business. Do as much research as you can about the software programs and systems that others use, but remember, you need to choose a system that works for your business. Certainly speak to your accountant and enlist their help to get set up and in generating and analysing initial financial statements, but don’t rely on them to take over the responsibility for your financial management. You need to understand the financial data coming from your business to the extent that you know how your management decisions impact upon the condition of your business.
For many in business this may all seem surprisingly simple, but to others who are new to starting up and running their own business, it can be daunting and demoralising, particular if all the other aspects to starting the business seem so much simpler and less confronting. It often seems easier to avoid it where possible or let someone else do it, but in the long run, this can be costly – and not just in dollar terms. And you never know, you might actually learn something…