Isn’t it funny how the moment the Finance Executive in the boardroom starts to talk about numbers half the room form glazed looks and cannot follow what is being said? It’s interesting because the same is not true of production or marketing or human resources. All of these specialities too have their jargon, yet somehow there is a fear of numbers which makes the room go quiet.
Despite the innumerable reasons why people go into business, money is a key factor to sustain or grow the business. Regardless of an entrepreneur’s background, he or she has to be able to run the numbers. The person who holds the purse-strings in the company, is the person who runs the business. There is no room for dependency when the business is yours!
WHERE TO LOOK
The truth is that financial statements are pretty easy to understand. Too often, we feel intimidated by numbers but if you know what to look for and how to interpret them, it can be a walk in the park. An effective business coach will bring an array of business experience and competencies, one of them being the ability to teach an entrepreneur how to work with figures. To be in business, one needs to be able to run the numbers. What will a SA Business Coach teach you?
There are three main accounting tools/reports which show you how well your business is doing. These are:
- Income statement
- Cash flow
- Balance sheet
The income statement is prepared before the balance sheet, which then leads to the cash flow statement.
THE INCOME STATEMENT
This document does exactly what its name tells you it does: It looks at the income and expenses of the business. It is compiled from a trial balance which differentiates where the money in the business comes from and where it goes to. Although the names of various sources may vary, the statement itself is a picture of where your business is, and how much you have earned and spent in a financial period (usually a year). It is through the income statement that you determine if your business has made a profit or loss over the financial year.
THE BALANCE SHEET
This is a list of what you own and what you owe. It is set at a particular point in time, so it does not consider what has happened in the past and what may happen in the future. It is a snapshot of where the business stands at that specific moment. Through this document you are able to see what your company is currently worth. This is known as the book value.
THE CASH FLOW STATEMENT
As opposed to the income statement, which includes loans, depreciation, debts, and the likes; and as opposed to the balance sheet that informs the business of what it owns and owes; the cash flow statement tells you how much cash you have in your business. It shows how well your business generates and manages its cash. There are 3 types of cash:
- Cash flow from Investments
- Cash flow from financing activities, and
- Cash flow from operating activities
When you look at these 3 financial statements together, you can clearly see their relevance. It is absolutely vital for any business to know where it stands financially.
An entrepreneur can only make the best decisions for his or her business with these 3 documents as a guide. Part of having the advantage of a business coach is not only to help you to understand these tools, but to keep the decisions grounded with realistic financial backing.
It may not be the most accurate measure of success, but as P.T. Barnum put it“Money is a terrible master but and excellent servant”. When we worship money and allow it to lead our business, we are unable to separate ourselves from it, yet when our money works for us, our relationship with finance becomes extremely positive.
To understand more about how a business coach can teach you to ‘run the numbers’, contact us at SA Business Coaches and we will match you with a coach to help you along your entrepreneurial journey.