Financial Information Is Financial Power...
Some months ago, I wrote a short piece on why it was important for business owners to have a grasp of the financial state of their business.
My view was (and still is) that business owners need to understand the different factors that affect how their business makes money and therefore how much it can make in future. Many tend to focus solely on costs, but this isn’t the be-all and end-all of running a business. If you want the business to grow, the associated costs will naturally grow as well.
I listed several questions that a business owner should be able to answer, the most important of which were:
- How profitable is the business?
- How strong is the business financially?
- How much can it earn in the next 12 months?
Two of the above questions focus on the now; the third on the future.
The host of ratios and statistics that most business analysts produce answer the three questions above. Any competent accountant should be able to produce similar statistics (no doubt for a fee) and should also be able to advise business owners every year when they audit the accounts.
Not understanding your financial state results in:
- Making pricing decisions that aren’t backed up by facts;
- Choosing finance that may not be appropriate for your needs;
- Paying more than you need to for finance;
- Accepting terms or conditions from lenders that you don’t need to accept.
One of my first jobs as a consultant was to assist a client who felt he had to raise his prices. By taking him through the questions above (and a few more), we determined that he didn’t need to. This was just as well as the economy wasn’t doing well at that time and raising prices would have made him uncompetitive.
Having a good understanding of the financial strength and drivers of your business means that you can evaluate offers from a stronger position. In the event that you’re lucky enough to have competing offers, you can compare one against the other from an informed and objective point of view.
If you’re used to asking questions about your own business’ finance, you can then ask the right ones about the offer, such as:
- What’s the effective interest rate you’re being asked to pay (and how does it compare)?
- Can you afford it?
- What effect would any charges have on your total finance costs?
- Is any security requested reasonable in the circumstances? Some banks simply “lend to security” (in other words, as long as they have the owner’s guarantee and 100% tangible security, they’ll lent without really evaluating the risk involved).
Some businesses will be lucky enough to afford their own accountant (or book keeper) who may be able to manage most of this kind of analysis. Otherwise, it’s up to the business owner.
I have spent more than half my life delivering change 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 to offer solutions for improving performance, productivity and risk management. I work 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 . My website provides a full picture of my portfolio of services. For strategic questions that you should be asking yourself, follow me at @wkm610.
posted by William Martin @ 09:24
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