Often, when I talk with an owner or key operator of a business, they tell me that they don’t really like the numbers side of the business, or that they’re more comfortable in the field. This is completely understandable. Many business owners started out as technicians prior to taking over a family company or starting their own business.
But working with the numbers is a crucial part of running a company. To be successful as a business leader, you have to have a grasp of the basics.
Let’s start by getting rid of the idea that to care about the numbers in your business, you need to be the accountant/bookkeeper. That’s not your role.
We also need to throw out the thought that if you have an accountant or bookkeeper, you don’t need to worry about numbers. Accountants and bookkeepers break out your expenses into a useable format. They enter your business’s data to make understanding the information easier. Period.
Once they’ve done this, you need to review the information for accuracy, ask questions, and use the numbers to make needed adjustments. You, as an owner or leader, don’t have to be responsible for the data entry and number crunching– you’re responsible for checking the numbers and using the data.
Once you have your business’s financial information and have verified its accuracy, what do you do next?
Pay attention to the Big 5 — the five most important expense categories you should focus on to keep your business financials on track:
Use the numbers from your income statement to identify areas you want to investigate further and/or correct. For example, a high labor amount could be the result of low conversion rates, which may be due to overbooking technicians.
By identifying the high labor amount using your income statement, you can investigate the issue and understand what the cause is. Once you’ve identified an issue, you can work on possible causes and fixes. For instance, you could decide to have your company focus on maximizing each call to increase conversion rates and sales, which would drive down that labor figure.
Another primary financial statement you need to review is your balance sheet. On your balance sheet, a key item to always look at is your cash. It’s vital to make sure you have enough cash on hand to cover expenses.
You’ll want to review your current ratio, which is a number that tells you if you have enough assets on hand to quickly cover your short-term obligations. The current ratio is calculated by dividing your current assets by your current liabilities.
The next is your quick ratio, which is an extension of your current ratio. It removes prepaid expenses and inventory from your current ratio figure, because you’re unlikely to be able to convert those to cash quickly.
The quick ratio is your current assets, minus inventory and prepaid expenses, divided by your current liabilities. The quick ratio also measures your ability to pay short-term obligations. Both your quick ratio and your current ratio should be at least 1:1, or your business could be in financial trouble.
The final must-see ratio on your balance sheet is your debt-to-equity ratio (D/E), which shows how much debt you have compared to how much equity — or “true” ownership — you have in the company. The D/E ratio is your total liabilities divided by your equity. A high debt-to-equity ratio means that your company is leveraged and potentially at risk of default.
If any of these ratios are not where you want them, you’ve now identified them and can start taking steps to improve them. Improving your company’s balance sheets tends to take quite a bit longer than improving issues on your income statement. With dedication, however, both sheets — and your company’s finances — can be improved.
When it comes to your business’s finances, there are many more items to review and ratios to analyze, but this is a great starting point. Once you’ve begun reviewing these first few figures and feel you have a good handle on them, you might find that you like dealing with numbers more.
It’s my hope that one day, you won’t just tolerate the numbers of your business — you’ll love them.
To be successful as a business leader, you have to have a grasp of the basics.
Make sure you understand the impact of Paycheck Protection Program loans.
If you are generating accurate, timely financial statements, and the ratios are in line, you know that your company probably is healthy.
Financial benchmarking provides you the assurance that your business is going well, or the clues to when it isn’t so that you can take action.
Once owners are in the habit of receiving financial statements and asking good questions about them, they get more accurate.
