Today let’s talk a little bit about money. The issue is that the majority of people start businesses, at whatever level and size, with the main aim of making gain or profit. I know these days there are new brands of entrepreneurs, some called social entrepreneurs etc whose primary goal might not be money making. However, I am assuming that as an entrepreneur the goal or objective of money making is critical to what you are doing. Whatever enterprise you are operating, if you don’t place value on your monetary resources, soon that business will be extinct.
Now, do you the entrepreneur know some fundamentals of finance or managing money in your business? Do you have a system in place that helps account for your finances? Are periodic financial reports common in your business, or you think of them when the tax authorities knock at your doors? Do you have an idea of financial statements and what they mean to you and your business? Do you understand your operational costs, fixed and variable, and how you can control them? Is your product or service pricing correct? Why are your finances important in the first place? Below we will give an attempt at this last question for a start.
- Finance is a core function in your business and your inability to understand them and manage them appropriately may mean your entire entrepreneurial dream will be shattered. In other words, you simply cannot ignore finances or leave them entirely for someone to manage them for you. By the way, am not promoting micromanagement here. You can still be on top of your enterprise’s finances without sticking a neck to see the cheques your accountant is issuing daily, or keeping the cheque book in your safe.
- You can get a snapshot of the results of your operations for say a full year, in just a two-page document. The two critical reports you cannot miss are the income statement and statement of financial position. These are very powerful reports and with proper understanding and analysis you can draw a whole lot of lessons from them. The income statement comes in different names that include the profit and loss account or statement, statement of comprehensive income, operating statement etc. The statement of financial position also comes in alternative names such as balance sheet, statement of affairs etc. Basically I can say that the income statement shows whether you are making money or profits/gain or not. It shows whether all your running around during the year, making deals, purchase and sales etc have resulted into a gain or a loss. Simple and straightforward, isn’t it? The statement of financial position shows the net worth of your business, whether it has increased or not; the liquidity of your business, and of course a host of other issues that come with further analysis and interpretation.
- Arising from item two above, we can say that your good understanding of your business is enabled and enhanced when you understand your finances and financial reports and analysis. As an entrepreneur you can know what clicks and what does not. You should be able to foresee trouble before it comes around to disturb your sleep.
- Understanding your business finances very importantly helps in decision making. You can for example know whether you need to borrow or not, the amount to borrow if required, the pricing of your products or services, costs you can comfortably afford or those you should run away from if you desire to survive in business etc. Now, which entrepreneur does not need such very useful information?
- You can also avoid some common pitfalls in entrepreneurship by fully understanding your finances. I guess you can count a few enterprises that went under because of financial recklessness. Can’t you?
- Steering growth and expansion of your enterprise is also aided by good understanding and management of your finances. Don’t you think so my friend? Just take a look at some seemingly big and growing enterprises that go blindly into expansion, the next you will see is a disorganized and quick exit or collapse of the enterprise, sometimes with participants such as banks and other stakeholders coming in. Not good. Not interesting.
I think we need to stop here for today. In conclusion, making money might be difficult but losing money is very easy. Forget about the thinking some entrepreneurs have that if you employ an accountant you should relax and forget about your financial worries. I’m an accountant but I can give you a piece of advice – get to learn and understand your finances. Period.
Till then,
The Wise Entrepreneur
