Keep the Bathtub Full: Understand Your Numbers

Most business owners went into business to do what they love and do what they are good at –  and they hoped to make a living and improve the business’s value while doing it.  Most started their careers as employees, so they tend to carry an employee mindset vs. that of an owner, entrepreneur, or CEO.  As a result, some business owners have created a high-stress job for themselves, not a business.

Successful business owners create a vision of the business and think like a CEO.  Smaller business owners may wear several hats, but in order to become a better CEO, they must strive to delegate responsibility and create sustainable processes to deliver customer value consistently. Employee vs. CEO.  There is a big difference.  The successful business owner also understands their numbers – the balance sheet, the cash flow drivers, and the income statement as well as their overall performance scorecard. 

I’ve had many business owners tell me over the years tell me “I am not an accountant.”  True, but you ARE a business owner and you need to understand your numbers!  That means learning how to read and understand financial reports such as balance sheets and income statements and understand how they relate.  You need to understand your working capital needs and cash flow drivers.  Most business owners know how to read a P&L, yet have no idea where their cash is going. They wonder, “How can we be tight on cash when business is booming and sales numbers are growing?”

It is a common perception that reading and understanding financial statements is difficult.  Some of the problem is that many of the system-generated reports of many ERP systems are too detailed and difficult to read.  But also, business owners haven’t invested the time to learn how to read financial statements and interpret what the numbers mean.  I find it generally makes sense to simplify.

It reminds me of the bathtub illustration I learned from a banking CFO back in my KPMG days, used to explain the bank’s cash flow statement.  He said, “Cash is like a bathtub of water.  Cash comes in through the faucet and goes out through the drain.  The trick is to understand the flows in and out and keep the tub full of water.”

One way to gain confidence is to review your financial reports regularly.  Develop a weekly scorecard and review your financial statements with your controller or accounting team monthly.  Notice trends in key areas like new customers, sales, average transaction value, gross margin, cash flow turnover, and operational efficiencies. What are the financials telling you?  Are you increasing your company’s valuation or are you just sustaining a high-stress job? 

Spending time on this will help you avoid “reaction” mode (daily firefighting) and allow you to work more in “ready” mode. Ready mode is working on needle-moving activities, the kind that will truly grow your business in all the right ways.

If you spend time with your numbers, you will get better at understanding them. In addition to studying your reports, take a course. Read blog posts like these.  Prepare or update your business valuation.  Get people on your team that know financial stuff well and can help YOU understand it.  Trust me, everything you apply time to, you get better at.

Contact me for additional help!