Amazing and unbelievable as it might seem, many business owners today judge their company’s performance by its bank balance. Crazy, I know, but even those responsible for quite sizeable companies will often be content with looking at the numbers sitting at the bottom of a monthly statement and sleep well at night, totally oblivious of the true picture. (By the way, I’m not suggesting you should lose sleep, even if you were aware that you might have a problem; because that wouldn’t do you or your business any good either).
A company’s bank balance rarely reflects the true picture because it takes a mere snapshot in time and doesn’t account for outstanding invoices, monies owning, tax liabilities, wages or any other outgoing costs in the future. A true reflection can only be seen by looking at both sides of the coin through the eyes of a comprehensive report which captures the business’s entire financial picture: past, present and future.
I’m not going to go into the details of ‘how’ to do that just here (but am happy to talk through the details if you’d like to call me), as my purpose here is simply to make you think.
I say ‘many’ I meant ‘most’
The chances are you are one of those people who feels good or bad about their business prospects based purely on the bank balance. Apologies if that offends anyone, but from my experience ‘most’ of the people I meet either ignore or fail to grasp how serious a mistake this can be. Here are a couple of examples…
If a football team was 4 points clear at the top of the league: you’d think they could afford to feel quite pleased with themselves. But at 3 points for a win and having played 3 games more than the team in second place, the original statement suddenly doesn’t read quite as well. On the one hand, the ‘points in the bag’ are not a bad position to be in – but the bigger picture is that it would be foolish to get overconfident.
Likewise, consider an adventurer who sets off for the South Pole having worked out exactly how much food, clothing and supplies he might need to make the journey. Despite all of the training, preparation and publicity he has garnered for his epic trip, it will quickly turn into a disaster when he realises he forgot to plan for the trip home.
These seem like obvious examples, and surely no one would fall into those traps – but both of these scenarios (and many more like them) have happened in real life events.
Do you know what you owe?
This is important, and it is so much more than just cash flow! You cannot simply look at all the outstanding bills either and think that is the issue sorted. What about tax liabilities that you are accumulating at almost every transaction: do you know the running total and when it will be due? Are you aware of the ongoing cost of each sale you make? Are your perpetual insurances, service contracts and staff bonuses all covered?
Accurately measuring your business performance (from a financial perspective) is a critical element of running a successful enterprise. It tells you how much you can afford to spend to get a new customer; it gives you the confidence to invest in growing your capabilities, and it allows you a well-earned, fully deserved good night’s sleep.
The good news is that with software like Xero, what was once an overly complex, almost impracticable, task has now become relatively easy – if you know what you are looking for…
Call our team now and find out how reading your balance sheet can be as simple as checking your bank balance, and far more enlightening!