How to Protect Your Business by Mastering Your Finances
Your business is like a bunch of wires serving light to your really big house, all of which converge at the control box. If there is damage at the control box, depending on the gravity, you may have to go a night without lights until it’s fixed.
Worst case scenario, the damage could be so bad, you’d either have to rewire the whole house with new cables or go permanently without light. That control box where all the wires converge is your finance! Handling it carelessly could either damage your business or ruin it totally!
I really don’t mean to scare you, but what must be said, has to be said.
How then do you handle your finance? It is not enough to understand a profit and loss statement, but by year end, you should be able to understand how you got to where you are. Hire the best accountants, as they are very important, and allow them do their jobs. Delegate to them but never abdicate your finances to them. There is a difference between these two words.
Abdicating simply means totally letting go, in most cases, because you don’t know the first thing about your finances. You just wait for whatever report they give you at the end of the month or year. This takes a lot of stress off of you, but is very risky. Delegating means you know all the rudiments, but you either need professional hands on or you want to channel your time into other things. By the time your accountants give their reports, you know what to expect. And if something is not right, you can spot it.
Having a firm grasp and detailed knowledge of your finances will help you realize when you are stalling or growing. When you can monitor your growth, you’d be able to scale up at will and protect your business. Hence, you need to put a measure in place that helps you master your finance.
We will help you decipher methods to master your finance in this article. Keep reading!
Know the Basics
As much as you need to outsource some necessary aspects of your business, there are some key points you need to understand. And the good thing is that, you do not need to be a mathematician of any sort or an expert. You only have to educate yourself to be proactive in managing your financial plans and budget, which in reality is one of your jobs as a business owner.
How did your company get to where it is financially? Are you good at analyzing your key financial indicators? Do you know how to create strategic moves that will maximize your profitability in your market? Do you know how to retain investments in your business going by your finance?
These are fundamentals which you need to know and you will begin by learning the two most important financial trackers. They are the profit and loss statement, and your balance sheet.
1. Profit And Loss Statement (Income Statement)
This is the critical record of your finance that measures your business’ performance and profitability. It shows in clear terms how much profit you have made in your business over a period of time. It also shows your business loss and how the loss happened.
This it does through comparison of your costs to revenue over a certain period of time. Your profit and loss report should be in segments which show you each departmental budget ̶ as individual units and how it blends into your organizational strategy.
What I mean is that for every department statement, there should also be a record of the departmental fit in your company and how much that department makes or loses. This helps you understand what departments are doing well, and those with lapses. And this will guide you on your next mode of action.
Your profit and loss account should represent each of the following;
- Variable and fixed costs
- The different departments and overall organizational strategy of your company
- Cash accounting method or an accrual method
2. Balance Sheet
This is a reality mirror of the general condition of your business. It is a total cumulative of your assets which are the properties, whether fixed or in cash which your business owns. It also shows you your liabilities, which could be loans collected, monies you owe or obligations to others.
Lastly, your balance sheet will show you the owner’s equity which simply describes the health and financial vitality of your company. A lot of business owners are very ignorant about the balance sheet. They have no remote idea of this basic finance tracker or how it works.
It is important that you understand how to read your balance sheet, even if you have an elite team of accountants. Grab your balance sheet now, if you are a novice and look through it. While you do so, keep the following questions in mind. It will give you more insight and aid your understanding…
- What does this line represent?
- What is my position on cash?
- What relationship lies between my liability and assets, debt to equity?
- How old are my aged payables and aged receivables?
Get your accountants to answer these questions for you, and you will get better understanding from there.
Build a Team of Financial Experts
In mastering your finance, you still need the experts, because your knowledge is only limited. Your job is to assume the strategic level of financial management in your business. Hence, you still need to set up a team of financial experts that fit into your business. They will do a detailed work, guiding you on how to make the best financial decisions for your business.
Choose a team based on the values of your business. Do not just pick an accountant because they clicked the entire academic boxes or have a big firm. Big firms do not mean great accountants, and great accountants do not mean ideal for your business. They can be everything perfect but not an ideal fit for your business.
Hire an accountant who is an extension of your company. The best of accountants cannot do everything, so even as you choose, be your own watchdog for your business.
There are few attributes that you must look out for when building your financial team. Your financial team must have a great general business experience. The financial team must be well versed in proactive planning, and must teach you how to understand and manage your finances.
They must protect your business and see a market crash before you do. This is why they should have an in-depth understanding of business. Your team must understand the rudiments of running internal control and segregation of duties. This has the advantage of sparing strategic parts of the business if tragedy hits.
Your move to build a financial team is as crucial as creating marketing strategies and making every other important business decision. Get you a team that aligns with your value and truly sees the essence of your business. You would have made one of the most highly profitable investments.
Create Systems That Authorizes All Transactions
Life in itself is a risk. Running a business is a risk. But the biggest risk of them all is inviting a total stranger into your business and totally abdicating your finances to them. This is the father of all risks on so many levels.
Full abdication of your finances to an external contractor or even an internal team can lead to gross mismanagement of funds. It doesn’t stop there, as it could lead your business into huge financial crisis than your business can survive.
Most small and medium sized businesses do not have the financial depth to survive a financial breach. And even for big businesses, the breach may cause a partial collapse or cause the business to go into recession.
So, first of all, you need to thoroughly educate yourself on the financial position, health and vitality of your business. The second step is to hire those you can trust. This will lead to a healthy culture of productivity and effectiveness for your business. Source for reputable personnel to make up your financial team. A team of experts that can make you confidently go to bed without skipped heartbeats. I mentioned all you need to look out for above.
Lastly, as much as you need to trust your financial department, create and put in place systems that help you verify the effective and seamless operations of your business. Establish a system that authorizes all transactions to be made for salaries, investments, debt payments and all.
Everything should always be verified in details and authorized before transactions are carried out. Also, segregate duties and set up internal controls to proactively combat and protect your business against any financial issues or crisis.
Protect your business by mastering your finances…
Truth is as much as you should hire the best hands for your business, nobody is a better watchdog for your business than you are. You started your business with your sweat and slaved for it to get to where it is financially.
The worst mistake you can make with your finance is to entrust its totality into the hands of a perfect stranger without the slightest idea of how it is done.
It is time to be hands-on with your finance and every other aspect of your business. Get the required education that will enable you understand every tad bit of your financial records… from your profit and loss statement, to the balance sheet.
Go ahead to build a team of financial experts that not only tick the boxes for expertise. But a financial team that understands and aligns with your business ideals. They must be able to protect you from making bad business decisions and better position your financial strategy for growth.
Lastly, be in control by creating a system that verifies all transactions before they are approved. This is because leaving your business and finance in the hands of others smells doom. It is one of the fastest routes to financial breach and subsequent business collapse.
Never abdicate, only delegate!
To effectively do this, you need some support from a professional business strategist. One who will hold your hand through the implementation process of putting the necessary measures in place for your business. This is the time to get your financial house in order as we are nearing the end of first quarter, and tax payment is near.
Click here or use the button below to schedule a call with one of our professional business strategists!