On occasion I’m asked whether or not I’ll help someone write a business plan. I am often left feeling like I should say yes, and needing to defend my answer of “no”. For a long time I have focused on how much it would cost the small business owner to have me do it for them. In my opinion, when you are first starting your business, you need to reserve as much cash as possible. It will take at least twice the amount of money and time as you think it will take to get started and you will need the cash to keep a roof over your head. By the way, STOP spending $5,000 on a website before you even get started! Start with a basic stock site and upgrade to a more sophisticated site later when you are making money. But I digress…
Have you said any of these before?
- I’ve changed bookkeepers five times in the last three years
- I just can’t seem to get what I need
- Bookkeepers are all the same
Before we discuss the purpose of a cash flow statement, let’s first discuss what it is. The three sections of the cash flow statement are operating, investing and financing. There are two methods to use when preparing your cash flow statement, the direct method and the indirect method.
There are three major cash flow activities in each business. These consist of Operating, Financing and Investing. You’ve heard these terms before, but you’re not clear about how they appear in your small business. After all, you don’t have investments and you’re running your business with credit cards and a small line of credit.
Working with small businesses for the last 20 years has brought with it some very interesting experiences. One of the most common experiences is the cash flow management mistakes that business owners make. You might think that only the inexperienced business owner have these near death experiences with their companies, but I have worked with some very experienced, very savvy business owners who have made these very same mistakes.
My friend Susan Baylis at Medical Account Solutions lays out some important points of lost profits in medical office billing processes in her blog “Maximize your medical receivable with a few simple steps”. It’s important in all types businesses to have solid processes in place for billing as well as collecting. Part of cash flow management is having proper training and support in place so that the staff can be successful in protecting precious profits for your business.
Every business owner must know their numbers.
I know, I know… you hate to look at the numbers, it’s boring. But really, is that an excuse not to look? How can you make effective, informed decisions without knowing your numbers? Can you answer the following questions without too many manual calculations? Is this information easily accessible on demand?
These are just a few questions that every business owner should know as well as they know their own name. You may be asking yourself where would I find these numbers? There are four core reports that you should be requiring your CFO to review with you every month.
These four reports are:
- Income Statement (also called a Profit and Loss Statement)
- Balance Sheet
- Statement of Cash Flows
- Cash Basis Cash Flow Forecast (I like to call this one an Operating Cash Flow Forecast)
These four reports will provide you with valuable information to guide you in making sound financial business decisions for your company. If you don’t know how to read these reports or how to determine what is a good statement or a bad statement, do not feel that you can’t ask! Remember that CFO’s and Accountants spend many, many years in school and in the field learning how to create and interpret these reports.
Don’t expect because you are a business owner that you should automatically know how to read the reports. As a business owner it is your responsibility to understand these reports and how you and your employees actions affect the financial health of your company.
It is also your responsibility as a business owner to find the right people for your team that complement your strengths. Hire experts that are good at the things you are not and complement you. Many of these experts are also available on a part-time or as needed basis. What is hiring your compliment? That’s another post for another day!