Your Financial Score Card is Not Secret
Over the last several weeks, I’ve been sharing with you my top 5 proven methods that have helped companies obtain positive results in cash flow and profit. We’ve already discussed the first three in detail, and they included:
- Unlocking the Secret of Your Cash Flow
- Working Capital – How Much Do You Need?
- Profit Does Not Equal Cash
Today, we’ll look at a secret . . . that’s not really a secret.
Proven Method #4 The Secret: Your Financial Score Card Is NOT Secret.
Many business owners rely on OTHERS to tell them how they are doing financially. This is quite risky! How can you grow your business without the Financial Intelligence to understand & interpret your own financial score card? Unfortunately, as I’ve seen, many businesses don’t produce an accurate or timely financial statement, which exacerbates the problem. Also, most businesses focus on the Income Statement as their only measure of success (i.e. profit).
Does your Income Statement include a % column that calculates the % of Income for each line item, and a Gross Profit line? If not, how do you know where to begin to improve your profitability?
To really understand your cash flow it is vital to focus on your other financial statements: the Balance Sheet and Statement of Cash Flow. The Balance Sheet shows you where cash has been converted to other assets required to operate your business: Inventory, Work-In-Process, Accounts Receivable, and Fixed Assets.
Does your Balance Sheet include a ratio analysis of the current month plus historic ratios? Again if not, where do you begin to improve your cash flow management?
The MOST critical financial piece that many companies don’t produce is The Statement of Cash Flows. It will tell you if you are generating cash flow from our Operations (critical to staying in business), are you continuing to invest in your business model, and are you borrowing to fund our Operations (i.e. is borrowing how you are generating positive cash flow).
You don’t need to understand the underlying concepts like your accountant; however, understanding the fundamentals as a non-financial reader will allow you to ask the right questions, and make better decisions based on the answers.
Next week, we’ll talk about a fun one . . . my favorite “F” word. Can you guess what it is?