This is my June column in Entrepreneur.
Do you want to do everything you possibly can to ensure the survival and growth of your company? Of course you do. Well, one of the most essential skills that you can bring to your company is understanding, tracking, and using certain numbers.
This numeracy–thinking in numbers–is a vital, vital skill.
Let me explain. In my experience, far too many people feel that they aren’t good at math, or didn’t take accounting, or whatever. Using this as an excuse, they hire someone else to watch the numbers for them. This is two mistakes in one. First, they’re selling themselves short. Anybody can work with numbers, and the kind of number-tracking I’m talking about requires no advanced mathematical training or professional degree. Second, there’s no substitute for you in this process. Nobody else out there is as motivated as you are to get the numbers working on behalf of your business.
Yes, your accountant can prepare your P&L statements, tax returns, and balance sheet and offer certain kinds of advice based on rules-of-thumb and industry norms. (By the way, an accountant with lots of experience working with companies like yours can be a gold mine of comparative information.) But you simply can’t count on quarterly meetings with your accountant. In order to run your company properly, and dramatically reduce your risk of failure, you need to get access to certain numbers quickly, and use those numbers effectively.
Here are the numbers you should have at your fingertips:
- a snapshot of the company,
- cash flow statements that are regularly updated,
- cost analysis of your product(s),
- break-even analyses, both for the company overall and for each new product.
Here I will only discuss the snapshot of the company. My goal is to get you comfortable with these numbers–by which I don’t simply mean that you’ll be able to generate them, but that you’ll understand them and be able to adapt and use them effectively. In general, my prescription is, know and love these numbers! Note, I am not saying you have to prepare the snapshot yourself. When you’re small, you can have your accountant or bookkeeper prepare them for you; and if your company grows to the point that you can afford a chief financial officer, then he/she will take responsibility for preparing the numbers.
I call the following chart the Company Snapshot because I want to convey the idea that it’s quick to read and absorb. I’ve done it weekly because that’s been the interval that’s proven most helpful to me in my businesses. One manufacturing company I’ve worked with does a similar report daily. Depending on the nature of your business, you might find a bi-weekly report adequate, particularly during slow seasons. In certain situations–for example, where your company is temporarily flush with cash–you may decide that a monthly snapshot is adequate. But you can’t make that decision until you understand the snapshot, and how your company performs against that snapshot. So my advice is start weekly, and adjust as necessary.
The snapshot is meant to be simple. It’s meant to be easy to prepare–your secretary or bookkeeper should be able to do it–and able to be digested by you in no more than five minutes. Depending on the specifics of your business, you may want to add or subtract categories from the following exhibit. You might also want to use comparatives from a prior period. Just remember: Keep it simple.
Current assets: ______________________
Cash, reg: ______________________
Liquid assets: ______________________
Inventory (if a product company): ______________________
Current liabilities: ______________________
Accrued commissions: ______________________
Accrued royalties: ______________________
Fixed monthly expenses: ______________________
Loans outstanding: ______________________
Monthly sales to date: ______________________
Yearly sales to date: ______________________
Future orders to ship: ______________________
Open purchase orders: ______________________
The point of this report is to get the quickest possible handle on key aspects of your company’s operation, such as:
- Do I have enough cash to pay my bills? (You may notice that you’re cash challenged because your fixed monthly expenses seem to be too high. This should trigger you to start thinking about cutting some expenses or converting some to variable expenses.)
- Are my receivables running too high? (If so, is it because payments are running late? Or is it because my credit-checking system has fallen apart, and we’re selling more non-credit-worthy customers?)
- Do I have enough inventory to handle future demand? (A caveat: This report can’t tell you if you have the inventory in the right categories; only a detailed inventory report can tell you that.)
- Have we overcommitted ourselves in terms of inventory? (Most companies hit this stumbling block sooner or later. If your inventory figure is too high, it’s a signal that you need to get the kind of detailed report that would let you take the right immediate action–such as canceling existing product orders, heading off the placement of future orders, putting certain items on sale, or closing out certain items.)
- Are my sales on target as to projections? If not, why and what corrective actions need to be initiated?
Starting and growing a business can have you in chasing-your-tail mode with not enough time in the day to do everything. While you deal with this syndrome, you must always keep an eye on your numbers. This snapshot is meant to help you do so in a minimum amount of time. It will help you prevent crises by spotting them before they materialize. Most business failures are attributed to running out of cash. Let’s avoid that.