Welcome to our weekly entrepreneur newsletter! If you are new and would like to check out any prior editions, click here! And feel free to reach out to us with any suggestions, questions, or feedback. I got some great feedback from one of our readers last week that really opened my eyes to a different perspective on the importance of core values in running a healthy business. We’re all here to grow together, so thanks to everyone for being a part of this!
I read an article today that said that approximately 90% of entrepreneurs prepare monthly financial statements or at least have someone prepare them. However, only about 50% of entrepreneurs are able to read, understand, and interpret them. This is not suprising to me as I have spoken with many business owners who struggle to understand their finances. Many even track their businesses’ financial information only to be able to file taxes. I am convinced though, that in the fast-paced world of entrepreneurship, where decisions need to be made swiftly and confidently, understanding financial statements is not just an advantage — it’s essential. In the case of managing a healthy and profitable business, I really believe that knowledge is power, power to make sound business decisions about the direction of your business, power to act quickly before a crisis hits, power to create a business that gives you the life you want.
Of course, it is true that some entrepreneurs become mega-successful, building and selling their businesses for millions of dollars without having any training or skill in finance. However, in my experience, I see that business owners who do not understand their business finances, more often than not, find themselves in a constant struggle to grow their business to a level where they can make a decent living. We see that most business owners follow a system we often refer to as “bank balance accounting”. Many of you who have read Profit First have heard this term used extensively to describe the practice of making decisions based on the balance in our business checking account. We look at the bank account, and if there’s money there, we are free to spend it; whether to pay employees, pay bills, or buy new equipment. This system works whenever there’s cash in the bank, but quickly falls apart when you need to pay for payroll or pay a bill and find that there’s not enough cash. This is one of the most stressful experiences many business owners could have, having to face the possibility of not being able to make payroll. You don’t want that, and we don’t want that for you either. The challenge with operating a business like this is that we always tend to spend the money that is available to us. So, as our sales grow, our expenses inevitably grow at the same rate. This is why it rarely really solves our problems when our sales grow… because the cash leaves the door just as fast as it comes in, and there never seems to be enough left over.
Profit First is an amazing system, which uses this natural tendency of doing “bank balance accounting” to our benefit. I won’t go into too much detail about how the system works today, but you can find out more about Profit First by clicking this link!
Profit First is about being proactive, rather than reactive. It is a powerful step in getting back in control of your business and leading it rather than leading you. It is a very simple and easy system that can have a huge impact on the health of your business. One of the reasons for this, we believe, is that it takes several overly complicated concepts held in traditional accounting principles and shapes them and applies them in a way that any entrepreneur can understand, whether they have training in finance or not. It works with our habits and skill levels. We believe that every business owner can learn to understand their business finances and how to make good decisions using that information, and it really doesn’t take a degree to get there.
Whenever we begin the process of guiding an entrepreneur through implementation of Profit First, we will always complement this by teaching them how to read, understand, and interpret their business financial statements (such as their Profit and Loss, and Balance Sheet). We have found that this contributes greatly to their success in improving their business in many ways.
Just as one example of the benefits of this: regularly reviewing financial statements helps you identify trends, both positive and negative, before they become significant problems. A decline in sales or profit, or an increase in debt could signal underlying issues that need to be addressed. Early detection allows you to implement corrective measures swiftly, potentially saving your business from more severe financial troubles down the line. As you look for trends in your sales and expenses, you are also able to identify areas in your business that need to be adjusted. I recently met with a client who had just recently started looking closely at their financial statements. During one meeting, when looking at their Profit and Loss for each month of the year to date, they noticed invoices to one vendor were relatively consistent for each month, except in the current month, the amount decreased substantially. With some investigation, they found that there was a timing issue with the billings from that vendor, and there were several missed invoices would be combined with the next months’ billing, resulting in a much larger than normal bill. If they didn’t catch this early, they might have seen an excess of cash in the bank, and not knowing why, thought that cash was available to use on … something else. Then, when the next month came around, and this massive bill came in, they would be thrown into a panic, because the cash was gone and they couldn’t pay the bill. Our client was able to see this early, and reserved the cash so the future bill could be paid without any issues. And the weight that was lifted off of them, knowing they were in control of their business, was such a great feeling for them.
Seeing trends and identifying issues early is only possible by having your finger on the pulse of your business – by understanding your business financial information.
We have worked with many of you to help you learn to understand your business’ financial statements and have really enjoyed witnessing the drastic change in your ability to lead your business where you want it to go and achieve your business goals. It is an amazing thing when an entrepreneur gains this power and confidence over the direction of their business. This is our favorite part of what we do.
We believe that the best person to be in control of your business finances is you. If you would like help with learning how to understand and interpret your business financial information, to be more confident in the direction of your business, we’re here to help you. Here’s a link to set up a free meeting with us to learn more.
Thanks for reading and have a great weekend!
Adam Litster
Certified Profit First Professional and Pumpkin Plan Strategist
(816) 500-5779
