By Adam Lean
If you are like most small business owners, you got into business because you liked the product or service that your business provides.
A cook buys a restaurant because of their passion for food.
A dentist starts a dental practice because of their expertise in dentistry.
A fitness expert buys a gym because of their love of fitness.
These are all great reasons to start a business, however, to stay in business the owner must also possess, or hire someone who possesses, financial management skills.
You see, businesses fail every day – and it’s not for a lack of passion, or knowledge, or expertise – it’s for a lack of financial management.
Business owners must continuously take certain steps to have a financially healthier business. Not just so that they will survive – but so that they will also thrive.
Here are seven steps for you to take to have a financially healthier business.
Step 1: Have clear, accurate, and timely financial reports
It would be incredibly difficult for a sports team to play their game if they didn’t know the score in real time. How would they strategize? How would they know which players to put out on the field? How would they know when they should pull together and overcome a difficult situation? How would they know when, and if, they can celebrate?
The same idea is true in business – you must know the “score” at all times. You know the score by understanding certain reports – commonly called your “financials”. These are the reports that give you the score – they tell you if you are winning or losing.
There are three common “financial” reports that every business owner should become familiar with – the Income Statement, the Balance Sheet, and the Cash Flow Statement.
- The Income Statement tells you how much profit your business has produced over a certain time – typically a month or a year.
- The Balance Sheet tells you how much your business owns, owes, and is worth at a certain point in time – typically at the end of each month or year.
- The Cash Flow Statement tells you where cash came in from (inflow) and where it went out to (outflow) over a certain time frame.
As a small business owner, it’s not only vital that you have a basic understanding of these reports, but that these reports are also accurate and made available to you in a timely manner.
Step 2: Forecast cash to anticipate a cash shortage
How do you know if you should pack an umbrella before you go out for the day? You check the weather forecast. Weather Forecasting is simply someone predicting, using their knowledge and the tools at their disposal, what the weather will be for the day.
The same concept of predicting must happen in your business, too: someone needs to predict how much cash the business will have in the near future – ideally for the next 3 months.
As you are aware, a business must have cash in order to stay in business. Because you need cash to stay in …read more
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