Master These Financial Metrics to Succeed as a Business Owner or Leader
Advice from the Atlanta Hawks’ VP of Financial Planning
You get excited strategizing about ways to grow your business or planning next steps in your career and that’s a very good thing. You just need to bring that same level of passion to mastering the financial metrics that tell you how well your own business, or a company you work for, is actually doing. Even if you have no background in accounting or finance, you have to know your numbers.
“I encourage people to put their intimidation aside and make sure they understand the financial metrics that define the health of their business,” said Vice President of Financial Planning and Analysis for the Atlanta Hawks, Lester Jones. “One of the best ways to do that is to find the common bond between financial terms that describe your business and similar concepts you are already familiar with in your personal life,” he advised as a speaker in the Monica Motivates fourth annual Global Supplier Diversity Conference (GSDC).
You might think of a Cash Flow Statement as similar to a personal checking account where you track money coming in and out, and a Balance Sheet as a listing of all the things of value you possess, compared to things like credit card debt, loans and bills you have to pay.
Knowing the key numbers that reflect how much money your business is bringing in compared to how much is going out is also a bit like knowing your blood pressure or watching your weight; it tells you whether the business is healthy or struggling and whether things are improving or getting worse. “By keeping your finger on the pulse of your business through key metrics, you will have critical information to address challenges, avoid mistakes and take advantage of opportunities,” Jones said.
It’s not enough for your bookkeeper or accountant to know the numbers, Jones cautioned. Mistakes can go unchecked and you can miss critical opportunities to secure loans and investment capital if banks and venture capitalists are not confident in your financial acumen.
Know these things
To build your financial understanding (and overcome any feelings of intimidation you may have around it), Jones advises mastering these critical terms and concepts.
- Balance sheet
This is a snapshot of the business at one point in time which is why it’s always labeled “As of (a specific date).” It shows you what Assets you have – things that have value, like cash, your inventory on hand or buildings you own. It also shows Liabilities which reflect money you owe, to whom you owe it and when it’s due. Finally, your balance sheet reflects the Equity of your business, meaning its residual value or what it is worth if you wanted to sell it or seek investment capital.
- Profit and Loss Statement
Here, you can see money coming into your business as Revenue and going out as Expenses to determine Net Income or Net Loss (Revenue-Expenses= Net Income/Loss) over a specific period of time. A P&L statement can be generated annually, quarterly, or even monthly or weekly to help gauge how successful the business is. It helps you demonstrate to potential investors and others how well you are stewarding your resources and helps you track whether increased expenses in certain areas could drive even greater revenue resulting in a strong Return on Investment (ROI).
- Cash Flow Statement
“For some reason, this one scares a lot of people and they want to leave it to an accountant,” Jones said. “But you have to be close to these numbers and need to know exactly how money came into your business and how it left. If you follow the cash, it will tell the story of your business.”
Did you receive money from a bank loan, investments or from the operations of the business? By carefully tracking cash flow, you will know how funds are generated and if you have the cash to buy more inventory, invest in a new initiative and pay your bills. It can also help you project future cash flow so you know if you are positioned to make a major purchase.
Liquidity refers to the cash you have on hand as well as assets that can easily be converted to cash, such as a line of credit. Liquid assets provide flexibility to deal with an unexpected expense but also to provide Working Capital (funds used to operate the business) to invest in new opportunities.
Remember to pay yourself
One final piece of advice Jones offers entrepreneurs is to establish yourself as an employee of the business and remember to pay yourself. Although it’s common to invest everything back into the business in the early years, he urges founders to carve out some portion of revenue to take care of your own needs and to provide for your own future. When you really know your numbers, you will better know your business.