Three Keys to Clear Financial Communications
By Dan Boudreau
Have you ever heard someone claim they made a great whack of money, only to have them go out of business a short while later? These days, the internet is rampant with claims of whopping amounts of money earned in less time than it takes to clean your glasses. There’s a lot of miscommunication when it comes to business financials, some of it deliberate and some out of ignorance.
When conveying how much they have earned, the glass-half-full entrepreneur will usually default to the top line and leave out vital details. A simple claim like, “My business earned a million dollars last year” can fire the listener’s imagination to visions of the owner bathing in hundred dollar bills, when in reality he might be going down in flames.
At first glance, managing business financials seems like it should be simple. The owner sells products or services, pays the expenses, and then sits back and counts the mounds of profit. In actuality, it gets quickly complicated unless you follow a few simple practices. Once you understand the inner workings of cash flow through a business, it’s easy to see how an owner can go off the rails and become a victim of unclear financial reporting. However, nobody needs to go broke to learn good financial practices.
Here are three things business owners can do to ensure they always know the bottom line.
1. Know the language. The first critical step is to get a clear understanding of a few key terms.
- “Revenue” is the total money earned from sales, before expenses are paid.
- “Cost of Goods Sold” refers to the cost of inventory a business has sold during a particular period.
- “Expenses” are any costs relating to a business operation during a given financial period.
- “Profit” is the amount left over after all the expenses have been paid, and a true representation of profit would be after all taxes have also been paid.
2. Hire a qualified bookkeeper. Most financial vagueness arises from not knowing the bottom line. New business owners often think they’ll save precious dollars by doing their own bookkeeping. Unless the owner has bookkeeping skills, this can lead to disaster. Fact is, most people will not discipline themselves to do bookkeeping after a long day of managing a business and serving customers. Too often the task gets heaped into a shoebox in a corner of the home office until it’s too late.
3. Give your bookkeeper what she needs to do the job. This need not be difficult. Save all receipts and invoices related to your business and pass them on to the bookkeeper each month.
These things will position you to know where your business stands at all times. Being on top of your financial game will enable you to budget and plan, to set prices for your goods, and to know whether you can afford that new computer; it frees you up to make day-to-day business decisions.
Next time you hear somebody say, “I earned a million dollars last year,” ask if that figure is before or after the expenses and taxes have been paid. The answer to that question should dispel any haziness, give you a sense of how well the person knows his or her business, and get the conversation on a clear track.You are welcome to publish this article providing you attach this statement with the link back to the RiskBuster website:
“Dan Boudreau is President and CEO of Macrolink Action Plans Inc. and the RiskBuster Business Plan Oasis at http://www.riskbuster.com Writing your own business plan can be easy, fast and fun! Instantly download a free copy of Dan’s popular fast-track business plan template, The Shell, when you subscribe to the RiskBuster Business Plan Insider at http://www.riskbuster.com”