Finances are the lifeblood of every business. Finances are also the primary metrics of every business. No business can be successful without the proper planning and managing of finances. In the past three years, Weavers has engaged with more than 200 businesses. Thirty percent of those businesses had accurate financial records. As we discussed under the topic of planning, budgeting is an absolutely critical skill for any business owner. The business budget is the financial road map of your business. The first question a budget should answer is: “What is the cash flow of my business?” The definition of “cash flow” is “the number of dollars required to cover the cost of labor, materials and overhead as incurred. Startup businesses typically have negative cash flows requiring outside sources of capital for the business to survive. Successful and thriving businesses have positive cash flow and consistently generate revenues in excess of expenses. Positive cash flow and profit are two distinctly different results. No business will survive prolonged periods of negative cash flow.
Many small business owners who have come to Weavers are not familiar with income statements and balance sheets. The income statement provides a picture of revenues and expenses and profits. The balance sheet provides a snapshot of the assets and liabilities and the owner’s equity in the business on any given day. The accuracy and reliability of income statements and balance sheets is only as good as the accuracy of the data input into the businesses accounting system. Weavers has reviewed hundreds of balance sheets and income statements generated by QuickBooks and similar accounting systems. Our experience indicates that only about 20% of those income statements and balance sheets are truly accurate. A business cannot be operated without accurate financial information.
There are other areas where typical small business seems to suffer because ownership and management is lax or untrained. Timely and appropriate invoicing and collections of receivables is absolutely critical. A recent Weavers client was overdrawn at the bank by $23,000 and did not have the necessary funds to make payroll. They also had more than one hundred thousand dollars in accounts receivable, some of which were delinquent more than 120 days. A small business will not survive if it does not manage its accounts receivable collections.
Every small business has vendors who provide goods and services. Paying those vendors in a timely and accurate manner is absolutely essential. This is a function called accounts payable. If the accounts payable function is not handled properly, vendors and suppliers will cease to provide goods and services needed by the company.
There are other financial skills and abilities that every good business must know and understand. Each one of these subjects requires time and attention from the owner of the business and as the business grows and becomes more sophisticated, these issues become more important. They include; utilization of credit, purchasing and leasing, income taxes, business valuation, and acquisitions mergers and divestitures.