Thursday 28 April 2011

How Is Your Business Performing?

It’s surprising what understanding a business’ accounts can tell you.

I learnt my “Business Banking” in Hong Kong lending to small traders who sold anything anywhere if they could make money on it. They didn’t have accounts audited by the “Big Four”. You had to meet the owners and see the business for yourself.

The accounts were always a good place to start. However, you had to look at what lay underneath the actual numbers to understand what drove the business, and what the owner’s plan was. You had to get close to him or her, and to be able to react quickly when things changed.

I was recently asked to have a look at the accounts of the client of one of my professional associates. The client’s margins were falling, and he was worried that he might have to raise prices. Not perhaps the best thing in a recession?

I looked at three years’ worth of accounts and suggested that the business should implement a budgeting and review process. On being asked how I knew that they didn’t have one, my answer was simple – the numbers told the story.

There was more: the business’ book keeper wasn’t consistent in the way that he/she passed entries, and the business’ auditor had signed off on some glaring inconsistencies.

In all, the numbers in the accounts didn’t reflect what was really going on. Valuable financial information on which the owner would base decisions was either not there, or was wrong. This could have been disastrous if the owner was making decisions based on inconsistent financial information. Worse if he/she was looking to borrow money from a bank or an “angel investor”.

Good accounts can tell you so much about your business: where it’s making money and how much and where there are problems. With a few simple tools, you can see whether your business is becoming more (or less) efficient, debtor collection trends, your ability to service bank loans, and whether your business is sufficiently “liquid” to cover its debts as and when they fall due. What’s more, once you’ve spent the time setting up the tools you need, you don’t need to change them very often.

Knowing what’s going on in terms of your numbers gives an added advantage: you can talk confidently with accountants, bankers and investors. Many entrepreneurs are nervous in front of these types, but “knowing your numbers” gives you all the backup that you need.

I was born overseas and have spent more than half my life working in different world markets from the most developed to “emerging” economies. With more than 20 years in the world financial services industry running different service, operations and lending businesses, I started my own Performance Management Consultancy and works with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email. I recently published Financial Management For Small Companies Made Simple – an easy-to-read basic guide to business finance. My website provides an excellent picture of my rich and varied portfolio of services.

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