Why you should understand your business' finances

It is not uncommon for business owners to review their financial results once a year - with their accountant at the time of lodging their tax return. This can be up to 11 months after the end of financial year. This is when most business owners reflect on the year that was.

Typically, they focus on two things, did I make a profit or a loss? And how much tax do I have to pay?

I'd like to present a different scenario.

Imagine you have complete control over your financial information. Complete control meaning you know the financial implications of every decision you make before it happens AND you know your profit result before you get to 30 June. You make decisions around financing your business with confidence and you know when to scale up or scale down in real time (not after the damage has been done).

These two situations are in complete contrast to each other. Unfortunately, the majority of Australian business owners operate without any financial information. Even worse, they make major business decisions based on how much cash is the bank, rather than the true financial position of their business. This gives us some insight into why the failure rates of businesses in Australia are so high.

Australians have a love affair with small business. It is a dream for many Australians to run their own business with many pouring their life savings into buying or establishing a business. So why do we put the blinkers on when it comes to financial information? Is it the fear of bad news? Or is it the lack of knowledge of what to look at?

In my experience it is the latter. Most entrepreneurs and business owners do not have an accounting degree. What they do have is amazing ideas and passion for their business. Unfortunately, this is not enough. Without a full understanding of your financial position, it is easy to make bad financial decisions and send your business down the drain.

"Ok, I get it but I am not about to go and do an accounting degree".

Well the good news is you don't have to. Overcoming your 'fear of the financials' is easy. Start looking at your financial reports (i.e. Profit and Loss Statement AND Balance Sheet) every month and ask lots of questions. Ever wonder why you have a profit that you are paying tax on but no money in the bank account? The answer is in your Balance Sheet - and it's so simple to work out!!

Find out how to run your own reports rather than relying on someone else. Stop running your business by the bank account, and start taking full control for your financial position. Empower yourself, make business decisions with all the information, rest assured the results will be outstanding.