Guident Newsletter – January 2018 – Issue 21
Understanding financials, as easy as riding a bicycle?
Imagine being introduced to a bicycle for the first time as an adult. You are told all you have to do is hop on and start peddling, it’s easy! You think about it and you have your doubts. After all, you have had classes on Newton’s Law of Gravity and you understand that the force which caused the apple’s acceleration (gravity) must be dependent upon the mass of the apple. Common sense tells you that with your mass, you will hit the ground hard when you tip either to the left or the right. Yet, you see small children enjoying riding their bicycles without falling. How does this work, the rider should tip and fall, this riding a bicycle just doesn’t make sense. It won’t make sense until you are taught how to ride the bicycle and more importantly until you believe you can balance the bicycle and NOT fall to either side.
I am suggesting you think of financials like riding a bicycle, they will not make sense until you are taught how they work and more importantly until you believe you can understand them. I have worked with several artists who own their own businesses. They often tell me they will never understand financials and they explain to me that “it’s a left brain, right brain thing”. I say nonsense and once they are taught how the financials work, they get excited and very interested in their company’s financials because they now understand the numbers and what the financials are telling them about the performance of their businesses.
If you do not fully understand the financials of your organization, you are putting your business at risk. It is your responsibility to educate yourself on the three main financial statements; the profit and loss statement, the balance sheet, and the cash flow statement. Most owners I work with who are very technical look at the profit and loss as the “Holy Grail” of the financials when in reality it is number three on the list. Don’t get me wrong, the profit and loss will tell you how your monthly operations are doing but as the business owner, you are responsible for the financial health of the company and that information is found on the balance sheet and cash flow statement. Every once in a while I meet with someone who is thinking about starting a business of their own. I ask them, “Have you ever been responsible for the financials of an organization?” They often answer, “Yes”. I then ask, “Did you write out the checks and manage the cash flow?” They often answer, “No, the owner did that stuff but I ran the business and always had a good profit and loss statement.” It is at this time I must explain to the person that unless they have managed the cash flow of an organization and understand the balance sheet, they really haven’t had the experience I feel they need before they invest their hard earned dollars into starting/buying a business.
As business owners we know you don’t invest more money into a business that you are willing to lose or can afford to lose if the organization goes south. This is just reality. One way to protect your owner’s equity is to fully understand your financials. If you can’t ride that “financial” bicycle today, you need to hop on and get educated. Don’t let excuses such as, “it’s a left brain, right brain thing” or “a fear of falling off” stop you! You will enjoy your business a lot more once you fully understand what the financials are telling you.