Does this sound familiar? According to the SBA over 50% of small businesses fail within a few years of their founding. Many experts believe one of the principal reasons for their failure is the lack of money. I believe one of the principal reasons for failure is that the owner just “can’t find the money.”
FOLLOW THE MONEY! Managing the finances of a business of any size is no small challenge requiring time, patience and knowledge. To survive in the very competitive business world you must earn profits, generate cash flow from these profits and control your financial condition. (And this on top of hiring and supervising your employees, selling and taking care of your customers, billing, collecting, purchasing, paying vendors, managing payrolls!)
CASH VS. ACCRUAL: So what basis of accounting should you choose to manage your business: Cash basis or Accrual basis. The answer is BOTH! Cash basis accounting doesn’t tell you the profit for the period, and accrual-basis accounting doesn’t tell you the cash flow for the period. Credit sales are recorded as revenues but if the client takes his time to pay, your profits are not generating cash.
FIND AND KEEP (CONTROL) THE MONEY: Read your Company’s Income Statement carefully (and often). It tells the story of how you made your profit: what customers buy the most, what products earn the most, and who in the organization is spending the most. The statement of cash flows will show you where the profits you earned ended up (“where is the money?”): delinquent customers, vendors asking to be paid in advance, the cash deposit for the new van. And don’t forget the Balance Sheet. Don’t just stare at it, analyze it. It will show you if you are borrowing more than you should, if your credit terms need tightening, if it is time for a “fire sale” to get rid of the old, slow-moving inventory.
GIGO: GARBAGE IN/GARBAGE OUT. Remember that the quality of the financial information you rely on to manage your business will depend on the quality of the financial accounting, management and control system you use. (More on this subject in a future post).
Questions?
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