I hope your first couple of weeks back to work are going well so far, and that you’ve taken some time to start thinking about your financial future. Maybe you’ve already made an appointment with your financial advisor?
This is week 2 of my 4-part Financial Freedom series and this week I want to talk about one of the biggest reasons business owners never achieve the level of financial success they think they should.
Abdication of financial responsibility.
This is very common issue in small businesses and it sounds something like this:
- Oh, I leave all the financial stuff to my accountant / book keeper
- I don’t get involved in the finances
- I don’t understand the numbers, it’s not my thing, I leave all that to someone else
And I do really get that finance is one of the trickier areas to get involved in. Finance hasn’t been made particularly easy to understand by some of the people who advise us – a lot of financial smoke and mirrors stuff goes on!
But here’s the good news – finance isn’t that complicated or difficult. It’s mostly adding up and taking away, with the odd percentage thrown in. Think you can cope with that?
Are you abdicating your future?
There’s a fine line between delegating and abdicating.
Delegating is absolutely the right thing to do if someone else is better placed to do your book keeping and accounts, and for most business owners this isn’t a good use of their time anyway. But delegation turns into abdication when you don’t take any interest in your finances or take responsibility for them.
The biggest thing that business owners abdicate is the understanding of their finances. Yet it’s the last thing they can afford to do if they want to create and have control over their financial future.
Do you really think anyone else cares as much about your future as you do?
There are just too many moving parts in a business, too many things that can go off track at a given moment, and too many ways that your accounts can end up in a mess, for you to ignore your finances.
So, as a business owner, these are the basics of what you should understand:
– Your profit and loss account. This is just adding up income, taking off costs to leave you with a profit. You should be very familiar with your own profit and loss and should know at any point in the year how much profit you’ve made so far. And ideally what your forecast profit and tax bill is for the full year. How can you possibly plan if you don’t know this?
– Your balance sheet. Leaving aside all the accounting jargon, this is just a statement of the things you own, and the things you owe. The bottom line of your balance sheet is the total of all the profit you ever made and kept in your business, and is the cash figure you’d be left if you stopped trading and settled everything. It’s extremely important to understand your balance sheet position.
– Your cash flow position and forecast. Tight cash flow is a very stressful to manage. Make sure your book keeper isn’t left alone to cope with situations like this. It’s your job as the owner to make sure there’s enough cash in your business and you know you have money put aside for tax.
Of course, there are many more things you should understand, but let’s just start with nailing the basics!
You could ask your accountant and / or book keeper to bring you up speed on anything you want to know. And PLEASE don’t allow anyone to fob you off with “oh you don’t need to worry about that, leave it all to me”.
It’s not their business and you DO need to understand!
Your next-step action plan
– If you don’t currently see your monthly figures, ask to see your profit & loss, and balance sheet for last month. Just to caution on this, unless you’ve got an experienced / qualified book keeper there are many reasons why these reports won’t be accurate, but this is a starting point. Make sure you understand the reports themselves and start to dig deeper to make sure they are correct.
– If you get your monthly figures, make sure you’re reading and understanding them. Query anything you’re not happy with and don’t be afraid to ask the “stupid questions” if you don’t understand something.
– Ask yourself
- Does your current financial information gives you the full picture of what’s going on?
- If something was going wrong how quickly would you know about it?
- Do you feel in control of your finances?
- And do you have enough information to start planning your longer-term financial future.
Obviously if this is an area you have under control, then you may have a gold star and go to the top of the class! And this should have helped your confidence that you’re on your way to building your financial freedom.
Next week I’m going to be talking about getting out of financial survival mode, so until then, have a great week!
If you missed last week’s post in this special 4-part series you can read it here – Week 1 2019 – the year to start building your financial freedom