In earlier posts we have talked about things like ‘It’s all about sales’ and business being driven by ‘People and Relationships’. Now all that is undeniably true, but there is one aspect of business that is so critical and fundamental that failing to understand it can undermine everything, and that is an understanding of the numbers and finances. So guiding principle number 11 is;
- Understand the numbers and the finances for your business – totally and completely
For those who are already comfortable dealing with the numbers side of things then this is going to seem like a slightly crazy thing to include. Well if you are in that category then you are one of the lucky ones, take a prize. The reality though is that for many dealing with the numbers and finances does not come so easily and it’s something that has to be worked on.
But I have my accountant for that
It’s a common refrain from those less at home with the numbers. It’s easy, I just outsource it all to my accountant. Well at one level there is nothing wrong with that, having a good bookkeeper or accountant help you keep the numbers side of things on the straight and narrow is totally logical and makes perfect sense, but that’s not really what we are talking about here. The key here is ‘understanding’ and being able to map managing the activities of a business to financial impacts, implications and outcomes. Logically we all know if we spend more than we earn something is going to go pear shaped one day, but the vagaries of business finance and the complexities of cash flow do mean that it’s possible for apparently profitable businesses to go bust! What we are talking about here is not so much about doing the mechanics of accounting, it’s more about having a sufficient understanding of how money moves through and is deployed into the business and how that is reflected in things like a profit and loss statement and a balance sheet.
For sure your accountant can tell you how things should be recorded, but what is important is to understand why they are recorded that way, how that may impact the options and choices you have open to you in managing the business. Far too often I see otherwise competent and sometimes quite successful business people totally floored by being presented with a Balance Sheet. Remember (and no offence to my accounting fraternity friends here) there is a reason ‘Accounting’ is a past tense word, it’s generally about telling you what has happened, a record of the financial transactions of the business that have already taken place. That’s important, but to manage a business effectively you have to be able to look forward and understand, predict even, what is going to happen. That is a less precise science and while accountants can be useful with things like cash flow forecasts, they are generally less able to predict the future. That’s why you really need to grasp and understand the finances of your business.
Not just the accounting numbers
Equally when I say refer to ‘numbers’ I don’t necessarily mean just the financial accounting numbers. There are other measures and metrics that will be critical to your business and you need to be all over them if you want to manage your business effectively. In guiding principle 3 – Its all about Sales, we talked about the need to manage and measure your sales pipeline and other ‘forward looking’ measures that provide early warning indicators of what tomorrow’s sales are going to be. These numbers are just as important as your financial accounting numbers. In a similar vein understanding numbers like your cost of sales and/or cost of goods sold is critical, you may be able to sell stuff, but are you selling it profitably?
Certainly if you ever get to a situation where you are pitching for investment then you will absolutely and totally need to be across all your numbers. I remember one pitch session were a CEO had delivered a really great pitch, everything looked totally good and everyone in the room was pretty impressed. Somebody raised a query about how the projected sales forecasts mapped to unit sales and the stated unit price of each product. Suddenly the whole demeanor of the CEO changed totally, the previously articulate and confident executive was like a rabbit in the headlights. There was a long pause, then a response to the effect of ‘I am sorry, I will have to get back to you on that, I am not really across all the numbers’. In a flash the previous 20 minutes of good work evaporated, sure numbers had been trotted out but it was now clear these were just well-rehearsed lines, here was a CEO who had just confessed to having no real understanding of the numbers driving their business. A spectacular fail, don’t let that happen to you, be it in front of investors, customers, anybody.
Don’t be numbers challenged
Of course, if numbers and finance are not home territory all this is easier said than done. I think though that a good starting point is to try to at least get a grasp on the basic principles behind double entry book keeping. I can’t do a crash course here, but do try to get an understanding of what the debits and the credits are that go into individual postings in your accounts. It may seem dull and boring (that’s because it is rather dull and boring!) but once you understand the essential principals of double entry bookkeeping then lots of other accounting related stuff becomes a lot easier to understand. Move on to reading and understanding a profit and loss statement and then a balance sheet. Understand things like the fact that a profit and loss statement is reflecting activity over period of time, but a balance sheet is a snapshot in time. How do you go about this, look at on-line resources, read books on the topic aimed at non accountants, maybe most importantly look at your own accounts and understand what transactions are posted to which General Ledger account and why. You could even ask your accountant why this amount is debited to this account and credited to this account, they should (hopefully) be happy to tell you.
Clear the fog
However you do it, do not let the numbers be an opaque cloud that you don’t fully understand. Some years ago when I was doing a business finance module as part of my studies one of the tutors summed it up quite neatly. When asked why we bother to study this stuff when we have no real interest in it and have accountants to do it, the response was “it’s so you know enough that the bean counters can’t run rings round you”! Maybe not the most charitable view of the accounting profession, but as good a reason as any to make sure you understand the numbers in your business.