It’s not just accountants and bankers who need to deal with spreadsheets, numbers and the financial aspect of a business, as most business owners soon find out.
As an owner or director, you will inevitably have some form of financial recording-keeping, reporting or analysis to perform, sometimes as a pre-requisite to achieving some other business goal.
Bank managers and investors constantly report that their most frustrating clients are those who have no idea what is happening in their business, and why. When approaching investors or banks for funding or even an overdraft, those who are unable to provide a good set of accounts, put themselves in difficult position and are much less likely to succeed.
If like many others, you find ‘Balance Sheets’ and ‘Profit & Loss Accounts’ extremely confusing, we have here some tips to help you start the demystification process:
What to do, if the success of your business is important to you:
1. See Finance As Something Important To You. It may be hard to become an expert but it’s relatively easy to understand the basics. If you are ready to devote a bit of time to it and possibly build a relationship with someone who is experienced at this - you too can make some sense of all those numbers!
2. Get some help. There are many cost effective options especially for small businesses. One choice is getting the support of a Finance Director to help you and your business as a whole. If so, it's essential to find a professional who is knowledgeable, patient and has a lot of relevant experience. If you have to learn from someone, personality matters.
3. Use The Many Online Resources Focused On Financial Literacy. There are many other free online resources for businesses, (including at efm.uk.com). Combine this with some practical support and you could be impressing your bankers and year end accountants soon.
4. Talk to Professionals including bankers, investors, accountants and business minded Finance Directors. The more you ask them questions, the more clarity you will have.
- Financial management is a critical aspect of any business, including yours: Profit and cash management are two areas of concern for any ambitious business, and these depend on the access to good, understandable data. Using, understanding and interpreting three key financial statements can mean the difference between having a successful company or having a struggling one.
- Bookkeeping must show relationships: Whenever a business conducts a transaction, the status of the accounts changes, and the financial statements capture these changes and show links from one account to another.
The three key financial statements that every business should have:
- Balance Sheet: This a statement of financial condition of the business. In essence, assets must equal the sum of liabilities and owner’s equity i.e. Assets = Liabilities+ Equity
- Profit and loss accounts: Statement of earnings: This records the inflow of revenue and the outflow of expenses and the aim is to show the operating profit or loss over a period.
- Cashflow Statement: This records the inflows and outflows of cash during a period. This separates cashflow from operations, financing and investing activities.
If you don’t have any of these statements, you must find someone to produce these for you. Each has its own unique purpose and when used together, they can be a very potent tool for any business. As your business grows or changes, this financial information plays an important role in four key areas: Data entry, Bookkeeping, Financial Control and Financial Direction.
Expert understanding will come with more frequent use of the data and regular contact with a Finance Director, who will help you make sense of the numbers and enable you to have more comfortable discussions with stakeholders.
How a Finance Director Can Help
The roles of Financial Control and Financial Direction are more complicated yet powerful processes, many companies employ Finance Directors, especially on a part time basis, to provide the strategic support. This includes developing long term plans, assessing risks involved in key decisions and helping to seek funding, most of which a company will be unable to manage internally. They will help to develop internal controls and key reports to enable the business run effectively, as well as improve cashflow and boost profit levels.
Finance Directors understand the importance of accurate and timely financial data and how to make best use of it. A Finance Director will help you use your key data effectively so that you too can understand the financial postion of your business . You will learn how to use the data as a foundation for improvement strategies as well as to manage risks, ensure compliance and liaise with stakeholders. With the FD’s involvement, you also have a sounding board to kick around ideas with, ask questions and get honest, unbiased advice.
In the past only the larger sized companies could afford getting access to an FD, now many thriving SMEs cannot do without a Finance Director, albeit on a part time basis. Sometimes all you need is one day a month with a good FD and the effects on the business are really obvious. To experience the true FD advantage, contact EFM for a free no-obligation meeting and let’s see how we can help you achieve your goals. EFM FDs are some of the best around, and we are mindful of the limited resources available to growing businesses, so we will work out a solution that is fit for you.
So, who needs to understand finances? Everyone running a business