Financial Intelligence for Entrepreneurs –
Why you need to know the numbers
Financial Intelligence for Entrepreneurs Why you need to know the numbers
You may be an inspired engineer or a talented salesperson. You may be wonderful with difficult customers and skilled at keeping employees happy. However, if you don’t truly understand finance, you’re at a disadvantage in the business world. Some people are just good with numbers while others need to work at it a little more. Perhaps you took an accounting class in school, yet that didn’t give you the education you needed to run a business.
The good news is, the math involved in finance is mostly addition and subtraction. For fancier reports, there may be some multiplication and division. Luckily, you won’t need to figure out any square roots or derivatives. Even if you hate math, or are afraid of it, you can be financially intelligent. With the right understanding and a few tools, you will quickly understand how to make sense of your finances and use that knowledge to make better business decisions.
Financial Intelligence expert Joe Knight writes “Most small business owners don’t go into business to generate cash flow or a strong and growing EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)—they go into business because they have an idea, or they are good at selling a product or service.” While many large company executives score lower than expected on financial literacy tests, most small business owners do even worse, scoring under 30%.
More Than Just the Checkbook
One reason for this disconnect is because of how many small business owners run their business based on the checkbook. Unfortunately, this is far from all the information you need to know! The bookkeeper may pay the bills, but you still need to read the financial reports. If your accountant or bookkeeper tells you something you don’t understand, ask them to explain it. It is far better to have the knowledge you need than to appear as if you already know it. “If you don’t know what questions to ask, your money whiz isn’t going to be able to give you an answer.”
Show Me the Money
Perhaps you are wanting to create a business from your place of passion, or aren’t in it for the money. You have to be profitable to pay the bills, even if you are running a non-profit. There are three reasons a company fails: they run out of cash, they run out of cash and they run out of cash. Having a financial plan is imperative for any company to make it longer than a few months.
Even if you love what you do, you have to pay yourself to put food on your table and keep the lights on. Plus, there’s nothing riskier from an investor’s viewpoint than getting behind a business because the owner needs the money. Work it into your business plan to pay yourself a salary.
One thing to watch out for is the debt trap. It’s very easy to get in over your head by buying things on credit because it may cause you to splurge on more than you originally intended. Avoid getting locked into long-term contracts before you can handle them and opt for month to month or as-needed options instead. Be patient and ensure you have the cash needed to cover your costs long-term.
You need to make specific financial choices that are different at every stage of the life of your business. Understanding the basics of cash management is a good start, but to truly understand your business financials you need work at knowing your business financial inside and out. It will it help you know where you are, where you were and where you are going, with confidence.
Very best wishes for your every success,