Hello! My name is Raymond Huan and in this video, I’d like to share with you the dangers of not understanding your business from a financial viewpoint, its consequences and what you can do to overcome it.
I have encountered businesses owners who have some semblance of knowing how to read a financial statement of their business, but don’t really take the effort to fully understand what this statement says or does; or what they communicate to them about their business. I understand that many times, you have focused on the product and the delivery of service your business has; and does to your customer, and therefore, you hardly have enough time to look at the financial statement of your business. On top of that, you get your Bookkeeper and your Accountant to take care of all things financial and submit it to the tax office, and that’s the last thing you want to do is to ‘understand numbers’. Well, allow me to share with you that the most successful business owners that I know have a very good and firm grasp on their financial statements as far as their businesses concern. Why is that so? They realise that by not understanding these statements, a few things would probably happen.
- You will not know what is going on.
You will not know what’s going on if you do not know how to read you income statements and profit and loss statement from your business. You will not know whether you’re really making money or not. I have come across businesses who think that they’re making money, but upon deeper analysis of their financial statement, they find that the money that they make is actually being utilised by another resource which they never thought possible before.
- You can’t fully utilise business resources.
You will not be able to fully utilise the resources that your business has, you do not know what’s going on. You don’t know how to use what you have because you don’t know what you have.
- It becomes difficult to plan ahead.
Even if you do not know what you have, planning your business becomes difficult. Planning for growth, planning for organic or exponential growth becomes next to impossible because you do not know the resources that your business has in order to go from point A to point B according to your plan.
So how do you overcome that? How do you better understand your financial statement? I will share that with you very soon.
Allow me to share with you two things that I’ve found that would help you get familiar with your financial statements.
- Ask for help.
You are not doing this alone. There are people out there who can help you. Your Accountant can help you, your Business Adviser can help you. Even a friend who is more familiar with financial statements can help you. Go out and ask them. The key thing that I’ve found for business owners who are not familiar and starting off their journey of getting to know their business better, is finding the right party or the right person who understands this statements and who is able to translate it to and make it easy for you to understand it. A person who is very technical, for example, a Forensic Accountant may be very good in understanding financial statements, but may not adequately be able to translate it to a ‘lay person’s’ term for you to better understand it. So you have to find a person who you trust and who can make it easy for you to understand. Go out and find that person and get his/her help for you to better understand your financial statements.
- Rule of Thumb
The second thing I found that helps you better understand your business is I call it “Rules of Thumb”. Basically, if you’re not too familiar with your business financial statements. Get someone who is familiar, sit down and do a thorough analysis and from there, start up with ‘Rules of Thumb’. For example, if you did a $100,000 a month and you’re making a 30% profit margin and all of your operational experiences are the same, in the rule of thumb your $100,000 a month is a breakeven figure; or a figure that you’re looking at to see that you’re comfortable.
Now this ‘Rule of Thumb’ works only if you know that in the immediate future there will not be many changes in your expenditure. You will not be hiring new people, you overheads will not increase, you will not be taking on your loans and therefore, your expenses are stable. ‘Rules of Thumb’ work very well in simplifying your financial statements to a few measurements that you can make just off the top of your hands. If you meet these criteria your business is hitting and ‘ok’ situation. However, it’s not adequate if you plan to grow the business in the future. So ‘Rules of Thumb’ work in a stable environment and makes life easier for you. You just need to formulate what the rule of thumb for you is.
It is my hope that these few things that I’ve provided for you, gives you a better idea on how to overcome the phobia that you may face in looking the financial statements. It is not that difficult if you do it properly; and will give you a very good tool for you to move ahead and be more aware of the business in the future.
I’ve authored the book from ‘$20k to $2 Million in 2 years’ which describes what company’s facing exponential growth go through. You can download a free preview of that book on my website. Feel free to explore my website because we got resources for you for people who are interested in business and who wants to grow their businesses in the future. I’ll look forward to hearing from you and thank you for watching this video.