Score Keeping Your Business
If you were in our office about a month ago you would have found me in a meeting with Paul, a tall, thin man in his mid-thirties who owns an equestrian business. During the meeting Paul said to me, “late last year I changed the direction of my business…” I said “great, let’s see how you are coming along with the new direction”. In other words, let’s looks at the numbers for your business.
Determining and tracking where an organization is financially at, is the purview of the Finance area of a company. Although some business owners and leaders may find finances unappealing and boring, it is absolutely critical to a business because if you do not pay proper attention to this function, you may run out of money and never achieve the dreams for your company.
Bear in mind the accounting, finances and financial reporting of an entity are not an end in themselves, but strictly a means to an end. In reality the true function of your Finance and Accounting area is it provides the “score keeping” of your business. But what are you keeping score of?
- Are you on track for achieving the Vision for your company?
- What is happening with regards to meeting the goals for your business?
- How are you doing with the execution of your business plan?
Three Score Books
This score keeping function involves different score books:
- Financial Statements
- Metrics
- Ratios
Financial Statements consist of your main two financial statements, an Income Statement and a Balance
Sheet – that are in turn produced on a periodic basis.
Metrics are the internal measurements of your business’ “systems” that indicate whether or not your systems are operating correctly.
Ratios are measurements that mainly use Financial Statement information to calculate values that are compared to other companies or industry averages.
For our remaining discussion I would like to focus on the first scorebook and lay the foundation to help you to understand what your Financial Statements are telling you about the health of your business.
With regards to your finances there are five main things you want to know about your company:
- Are you making a profit or loss?
- Are you managing your assets (Cash, Accounts Receivable, Inventory…) properly?
- Are you funding your business in the most advantageous way?
- Do you have the information to make strategic and tactical decisions?
- How can you operate your business in the best possible manner?
To understand your Income Statement and a Balance Sheet you need to be aware that your Chart of Accounts, which is the foundation of your accounting system, is separated into six different types of accounts, namely:
- Assets
- Liabilities
- Equity
- Revenue
- Costs of Sales (or Cost of Goods Sold)
- Expenses
Balance Sheet
Furthermore, your Assets, Liabilities and Equity are shown on the aforementioned Balance Sheet. To understand how the information is presented on a Balance Sheet you have to know that the Assets of a business always equal the sum of your Liabilities plus Equity. Therefore, using algebra, we can determine that when you take a business’ Total Assets and subtract its Total Liabilities, you end up with the business owner’s Equity.
Obviously your Assets (Checking Accounts, Accounts Receivable, Inventory, Equipment…) are good things. Versus your Liabilities (Accounts Payable, Credit Card Payables, Payroll Taxes, Loans Due, Notes Payable…) are generally bad things and your Equity is how much “skin you have in the game”.
Keep in mind that your Balance Sheet shows its information as of a certain date. Therefore, it is like a snap shot picture of your company’s financial health as of that particular date. If you compare your Balance Sheet from one date to another date, you can see how the health of your company has improved or deteriorated in terms of the changes to your Assets, Liabilities and Equity. This is called a Comparative Balance Sheet and it is like having your lab tests done with your periodic physical and then comparing how your Glucose, Cholesterol and Triglycerides, etc. have changed during that time period.
Income Statement
Your second Financial Statement is an Income Statement and it shows your Revenue, Costs of Sales and Expenses. Its formula is your Revenue minus your Costs of Sales and Expenses yields your Profit or Loss which is the final number of the bottom of the Income Statement, hence the term the “Bottom Line”. An Income Statement always shows financial information for a period certain of time, therefore it is like a movie of your Revenue, Costs of Sales and Expenses for that period of time.
When used together your Balance Sheet and Income Statement can be used to assess the overall health of your business and see what the “score” is how you are doing at accomplishing the goals for your business.
Customer Relations Manager
Lastly, there is one other tool that I recommend you use for score keeping in your company and this is a
Customer Relations Manager or CRM for short. While your Balance Sheet and Income Statement tell you very well where you have been and where you are at, they don’t tell you where you are going. Your sales prospects, sales funnel and upcoming sales predicts where you will be at as far as the health of your company. Therefore, we recommend using a CRM, such as the package by Results Software to systematize your Marketing and Sales functions and keep score of how you are doing in this all important area.
In summary, use your Balance Sheet, Income Statement and Customer Relations Manager to understand what the health of your company is and keep score of how you are doing at accomplishing the goals for your business.
If you need assistance with “score keeping” and fully understanding the health of your business please contact us so we can show you how to use this concept to tremendously increase your revenue and take your business where you want it to go.
www.FountainheadConsultingGroup.com
George.Horrigan@FountainheadConsultingGroup.com
Office phone: (770) 642-4220
