insight featured image
What is more important, The Profit and Loss Statement or the Balance Sheet? I have been asked this countless times over my career. But when attempting to communicate the value and differences of both tools, and the story they tell when combined together, my clients inevitably stare at me like I am speaking a different language. Perhaps I am. However, financial literacy is language anyone can learn.

Many business owners don't fully understand their financial information. This is completely understandable of course. Sophisticated businesses will have a dedicated finance team, however smaller businesses that don't have a finance team often struggle to dedicate the time and resources to understand the numbers.

Here is the one thing both ends of the spectrum have in common: the owner absolutely needs to have a handle on what their numbers mean and the story they are telling. Every business owner needs to become fluent in financial literacy. If not enough attention is dedicated to this area, it can lead to an avoidable business downturn.

Here are three areas to focus on to better understand your finances:

1. The first element to work through is structure.

I start my conversations with clients with a walk through of their structure. Some of the best meetings I have been involved in have gone off topic and down the seemingly never ending rabbit hole of the family business structure.

Over the years, it has become apparent that the majority of family business owners simply do not understand their structure; which entity is the trading entity, how it is taxed, how they extract cash and how/why has the structure evolved over time.

Knowing how the business is structured and how it operates from a financial and taxation perspective should be the starting point for financial literacy.

2. How often do you take time to sit down with your numbers and give them the attention they deserve?

I have spent many hours in my early career reconciling bank statements, de-coding cheque butts and manually inputting journals into accounting systems. In days gone by, this meant that it was normal to review a set of financial statements 6-8 months after the event.

For a business owner, receiving this information in a timely manner is essential, and waiting months is simply not acceptable.

There are several cloud based accounting tools that automate a lot of these old manual processes. Given the technology we now have, you should be able to see your most recent figures immediately.

Whilst cloud technologies have improved the speed and availability of the financial information, there is still data cleansing that needs to occur. There is no point looking at a set of numbers, only to find they are riddled with errors.

Reviewing your numbers monthly, after the data has been reviewed is a good practice. I try to sit with clients monthly or quarterly to review their current position. Part of this process involves ensuring the data is accurate. There is no point reviewing a set of accounts at say 31 March, when there are still adjustments needed to the prior financial year.

Key questions to ask yourself are: Do you understand what your numbers are? Are they good? What are you comparing them to? Are the benchmarks you are using relevant to your unique business?

So now you understand the numbers. But how are you going to use them?

If the business isn't performing, then what can be done to correct it? What levers need to be pulled? Where are the inefficiencies, which products/services aren't profitable, is the employment mix right?

If the business is performing well, what can be done to not only maximise it, but what are the tax implications? And is the plan for these liabilities? Where has the cash gone?

3. Don’t get caught up on the accounting jargon and get yourself a good advisor.

As a business owner, you have enough on your plate. Spending time delving into the accounting matrix is not time well spent. Your advisor is the expert so you don’t need to be.

The best advisors are those that can explain the technical accounting problems in a way that makes sense to you.

Whilst participating in a formal training course will obviously provide skills and knowledge, ongoing training/assistance from you advisor is essential.

I encourage clients to ask as many questions as possible. Every opportunity to discuss the numbers should be seen as part of an ongoing education piece. Remember that it can be complicated and takes time to understand.

It’s important to understand that every business is different, and a cookie cutter approach is not always relevant. As your financial literacy improves, you will come to understand your numbers in a new way and see new stories about your business and the options ahead of you.