Not knowing the numbers can put your small business in financial jeopardy

Scotch pie showing inside contents. Purchased ...
(http://www.dalbeattiefinefoods.co.uk) (Photo credit: Wikipedia)

Do you know the key financial numbers in your business? How well do you know them? If woken up in the middle of the night, could you give a pretty accurate estimate of where your business sits financially?

Without control over the financial and operational numbers in your business you really are operating blind. Knowing the numbers allows you to see potential problems before they occur. You can also operate and run your business with confidence knowing where you are going.

A report from Canada showed small-business owners were lacking in basic financial knowledge that could help them better manage their companies. The report said that while 93% of entrepreneurs surveyed did believe they have an average or even advanced understanding of financial management principles, 39% failed a 18-question financial literary quiz. About 57% achieved a score of 50% or less. With small businesses struggling to be profitable and competitive, this isn’t a good sign, said one of the people who ran the survey.

It wasn’t a difficult quiz. It just tested small business owners on their knowledge of financial management principles. Each question had a multiple-choice of four potential answers with one correct answer. Questions were asked to see whether small business owners understood basic accounting principles affecting a businesses’ cash position, understanding the role of a balance sheet, and identifying permanent assets needed to meet a businesses’ long-term needs.

The survey itself represents a good way for small business owners to create publicity for their business. The quiz got coverage in newspapers and on the Internet. Why not think of a similar set of questions on a topic that is important to your market, conduct the survey and then promote the results. If you would like to look at the free financial knowledge survey go to knowyourworth.ca.

Most business owners would know what revenues or sales their business is generating. They would also be acutely aware of the cash flows out of their business. But it’s another thing when it comes to understanding your financial position. That is where you need a strong understanding of your income statement, balance sheet and cash flow statement. It’s important also to know the interrelationship between all three statements so that you can see how each one affects the other.

The survey mentioned only went into financial literacy but other numbers in your business are important such as gross margin and net margin. It’s important to know the difference between a markup, gross margin and net margin. The gross margin is worked out with cost of sales while the net margin is worked out with cost of sales as well as all overheads. Tracking your gross and net margin over time is important because it can show how costs are creeping up in your product sales. Without an effective system to track and monitor your key numbers in your business you could expect to end up with some nasty surprises.

When you are starting a business from scratch, your business planning will involve estimating basic numbers in your proposed business. If you want to know more about how to do it, go here.

Double your potential with breakthrough ideas
Do you want to come up with new business ideas? Choose Idea Accelerator for practical, hands-on advice without the myths and half-truths.

Leave a Reply