Small business owners can reap tremendous reward through savvy knowledge and application of business finance. Truth is, many of those businesses that have failed in recent years might have had better success if owners were able to apply sound financial strategies that could help them steer clear of a financial crisis.
The worst time to make important financial decisions is in crisis mode. And often times the outcomes spell disaster.
To some entrepreneurs, finance is like learning a foreign language. It’s awkward and sometimes painful. But that doesn’t mean it should be avoided. The best approach is to educate yourself and continue to become comfortable with finance terminology and concepts. People say that accounting is the language of business; so if you’re in business, learn the language.
Key business decisions are often based on whether there is money in the bank or opportunity to access an equity line or take out a business loan. Money management and understanding of cash flows keeps owners moving their enterprise forward.
Interestingly that in recent weeks Oprah Winfrey made a bold announcement that she has often struggled with numbers and has avoided dealing with her personal math anxiety. If you’re a successful self-made millionaire then perhaps you will surround yourself with experts who will navigate your financial opportunities so you don’t have to.
But why not do both? It’s a great idea to work with financial mentors or business experts like a CPA. That doesn’t mean you need to wash your hands of the learning opportunity. And it’s never too late to get started.
Here are some financial documents and terms that Will Chen, local CPA suggests would be important to know about.
Do you have a functional grasp and understanding of the income statement which includes revenues, expenses and net income? Or how about the balance sheet which breaks out assets, liabilities and owner equity?
Don’t forget the statement of cash flow documents that identify operating, investing and financing activities.
Said Chen of the cash flow analysis, “Cash flow to a business is like blood to a body. Without it or lack of it, a business will not function properly and smoothly. Cash management is a critical skill that small business owner must master.
Chen also noted that internal control must be administered for a business of any size. “Internal control is a company’s plan and measure to encourage adherence to company policy and procedures, promote operational efficiency, minimize errors and theft, and enhance the reliability and accuracy of accounting data. Usually a small business owner will lack the resource and knowledge for internal control. However, as your business grows; internal control will become more and more important.
Financial ratios are used to help business owners, bankers and investors determine how well a business is performing in contrast and comparison within industry. Some ratios are used to evaluate debt, risk exposure or equity position. Others measure efficiency and profitability.
"Financial ratios are indicators often used by business owners and management to measure the health of a business,” said Chen. “For example, activity ratios, such as Receivables Turnover Ratio and Inventory Turnover are used to evaluate a company’s effectiveness in managing assets.”
It’s never too late to learn about these concepts. Investment in plant and equipment may be important to a manufacturing concern. However, personal investment in financial literacy may actually bring a far greater return to your business.
Learn more about financial literacy and SBA loans at our upcoming workshop on Wednesday evening, April 17.
Small business loan workshop
Everett Community College is hosting a Small Business Administration (SBA) Loan workshop in partnership with Coastal Community Bank on Wednesday, April 17 at 6:30 p.m. in Whitehorse Hall Room 105. Please contact Coastal Community Bank at 425-257-9000 to reserve your spot.
Juergen Kneifel is a Senior Associate Faculty in the Everett Community College business program. Please send your comments to firstname.lastname@example.org
Update: Because of confusion over an email, a rough draft of Juergen Kneifel's column was edited and initially published. The correct version of the column is above.