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This New Year's, don't just make those cliché resolutions about losing weight or quitting smoking—make 2008 the year you resolve to improve your hardwood flooring business. One way to do that is by actively managing your financial statements. You'll have a better understanding of your business and won't be left at the end of the year wondering why your company didn't generate the profits you expected. Here is a list of resolutions you may want to implement for your business for the upcoming year.
Resolution #1
I resolve to do a better job of managing my company financially.
I'm not presuming you haven't been doing a good job in this area. I'm only suggesting that we can all make improvements from wherever we are in our financial management. As our parents, teachers and mentors always told us, there is always room for improvement.
Business owners can never stop being diligent in the financial management of their businesses. Stay close to the quantities, line distribution and age of your inventory. Stay closer to your accounts receivable report. Become one with your expense management.
Even if you have hired someone to manage those areas on a daily basis, remember this: You can't delegate the ultimate responsibility for your business's financial performance.
Resolution #2
I resolve to create regular and accurate financial statements.
OK, I admit that this is a little presumptuous, but I fear any insults I'm in danger of delivering would be to only a minority of small businesses. After more than a decade as a business consultant, I'll wager that fewer than half of small businesses consistently produce regular (at least quarterly) and accurate profit-and-loss (P&L) statements and balance sheets.
I'm going to repeat something I've said at least 100 times: If the only financial report you have is the P&L and balance sheet you get once a year with your tax return, using that information to manage your business is like making a salad with 15-monthold lettuce. The lettuce is metaphoric—the 15 months is literal. In either case, the result is rotten.
With all of the accounting software available today, there is no excuse for every small business not to be managing with current numbers. These programs can cost as little as the price of a dinner for two, will work on inexpensive personal computers and are virtually idiot-proof. If you can read, add 2+2, and operate a mouse, you can be on your way to do-it-yourself financial statements in very short order.
The direct benefit is the ability to manage your business with fresh lettuce—I mean numbers. But there are also several indirect benefits that result with virtually no extra effort.
In order to create financial statements, you will be entering sales, purchases, disbursements, etc. As you place that information in your accounting program, you are simultaneously creating the ability to produce invoices, billing statements, sales-tax reports, inventory records and accounts payable and accounts receivable reports, just to name a few. How would you like to have the time back that you may currently be spending to create those records from scratch?
Business owners who do not use electronic capability to create their businesses' financial information are like someone eating a meal with their hands even though they know knives and forks have been invented.
Resolution #3
I resolve to learn more about what my financial records are telling me and, armed with that valuable information, manage my business more effectively.
Remember what the dog said after he chased the car and caught it? "Now that I've got it, what do I do with it?" Now that you've made a commitment to manage with current financial information and have created your financial records, what do you do with them?
If you're worried that accomplishing this resolution means you have to become a bookkeeper or accountant, stop worrying—it doesn't. But good business owners must at least understand the flow of the financial components of their businesses and how each one affects the others.
I believe business failures could easily be cut in half if anyone wanting to become a business owner were required to pass a course that taught the basics of cash flow, accounting and how to read and understand financial statements.
Do you know how to find out why, incredibly, sales are up but you're out of cash? It's on the balance sheet.
Do you know the first place to check to get an early tip that inventory may be creeping up? It's likely in your gross profit margin, right there in the middle of your P&L statement. Do you know where to find why you're not profitable even though you know you are maximizing margins and holding down direct expenses? The answer may be hiding in some of those annoying P&L line items like "bank overdraft fees" and that insidious "miscellaneous" account.
If you didn't know the answer to these questions, let me tell you how you can solve that problem: Do Financial Resolution #2 every month. If you build your statements, the understanding will come.
Resolution #4
I resolve to find out how my company's financial performance compares with that of my peers.
Every industry has its own rules of thumb for how much a business in that sector should be spending and how much profit it should be making—all based on sales volume. There are ratios and percentages produced by aggregating the financial statements of many businesses in a particular industry, for everything from payroll to payables, from inventory to interest, and from debt to deferred compensation.
Industries and financial institutions have been compiling and recording these indicators for so long, in such significant numbers, and at all levels of activity, that they are used every day by sophisticated managers as valid reference points from which to measure their businesses' performance.
Would you like to be able to call yourself a sophisticated manager? Find out how your peers are doing and put your numbers up against theirs. Robert Morris Associates is one publishing firm that offers this information in its Web-based solution program, eCompare2. There are other companies that offer similar solutions. They don't give these away, but they're not expensive. You may be able to find these publications at your local Chamber of Commerce, public library or small-business development center. If you're an NWFA member, you can access the association's "Distributor Profit Report" and "Dealer/Contractor Profit Report."
Write this on a rock ... The more you educate yourself on the financial fundamentals of business, the more you will seek financial excellence for your company. Along the way, you will become a sophisticated and successful manager of your business's financial performance.