Last time we looked at Financial Statement Myth #1: Financial statements are just history; I manage my business forward. The banks and tax men can use the financials but they aren’t much use to me. We learned that using your statements were critical in managing your business forward because they are the foundation to your budgets and monitoring your progress toward goals. This time let’s look at another myth common among small business owners.
Myth #2: I don’t really understand my financials, but they seem to keep the bank happy, so I’m okay with them.
Believe it or not, this statement is all too common. Obviously, the banking relationship is a critical one, maybe one on which the life of the business is underpinned. But, why hand financial statements to the banks without understanding how the bank is going to use them? Worse yet, don’t ever hand your financial statements to a banker and not be able to explain them. You need to be able to look at your financial statements like a banker.
This is a tall order, so you need to do your homework. First, are your financial statements produced accurately and timely? Unfortunately most small businesses will answer “no” to this question. Correct this immediately! As the owner of a business, you should have your financials in your hand no later than the 15th of each month.
Ask yourself “How will the bank view these financials? What are the points that are critical to the bank? What parts of these statements worry the bank (i.e., losses, excessive leveraging, poor current ratio, inappropriate asset investment)?” If you don’t know the answers to these questions, you have two choices. First, you can buy books on learning how to read financial statements. I recommend Managing by the Numbers by Chuck Kremer. If you don’t have time to read and understand this, then engage a professional like B2B CFO to get the answers. A few hours a month of professional help will be well worth it.
Make sure you address these questions immediately so that you can make necessary changes before it’s too late. Having this information on a timely basis can enhance your banking relationship.
Next time we will look at Myth #3: I don’t believe I lost money!