Financial statements and management accounts are fundamental tools for business owners and managers to make informed decisions, evaluate performance, allocate budgets, and navigate the complexities of business management.
Yet many business owners and managers have a superficial understanding of finances and make decisions based on limited understanding or limited information.
Our highly practical, Finance for Owners and Managers masterclass is designed specifically for those working in private business, to give them a greater understanding and confidence when it comes to accounting and finance.
Over the years we have seen several common issues that business owners and managers need to be mindful of….
- Building Business Value
Most owners and managers have a good understanding of profit and loss but are less clear about whether they are building business value. What is the relationship between the profit and loss and the balance sheet and where is the value of the business reflected in the financial statements? Are you generating an accounting profit or an economic profit? What is the difference between the two? Understanding how to build ongoing business value will positively impact your business.
- Cash is King
Most people have heard the statement, “Cash is King”, but many owners don’t operate their business to align with this statement. One speaker on the Owner Manager Program referred to cash as “Ace” – his point was that cash had the highest value, even higher than the King. Here was a guy that had built a $100m+ business by using the cash terms of his suppliers and prepayment terms of his customers.
The key is for business owners and managers to understand the relationship between profit and loss, cash, and business value. Understanding the levels of cash tied up in the business, cash required for growth, and how much free cash flow the business is generating is really important.
What type of business are you running?
Is business success based more on fixed cost improvement or variable cost control? We often see owners and managers not understanding key drivers of profitability or focusing on costs in the wrong area for limited return or in some cases a detrimental effect. Being clear on the business model is an important step in the process.
- Indirect vs Direct Costs
Often accounts have the incorrect allocation of expenses or revenue. Expenses that should be included in direct costs are allocated to indirect costs meaning the gross profit margin is inaccurate. Similarly, revenue or expenses aren’t allocated to the correct time period (month or year), which may aid taxation, but distorts the ongoing profitability story. Fixing these items is generally straightforward, but some bookkeepers and accountants can be a little sloppy.
- Matching expenses and overheads to income
This is particularly important in job or project-based businesses where a key driver of success is job costing. Sadly, standard small business accounting platforms like Xero are limited in their job-costing capability without addons. Whether it is by using spreadsheets or additional job costing tools, it is essential for business owners and managers to understand the profitability of individual projects or product and service lines.
- No budgets or forecasts
Many businesses operate without any kind of budget or forecast, effectively flying blind and having no measure of success. Budgeting is a reasonably simple process for established businesses. Historical numbers provide a level of understanding and a base for future budgets or forecasts. The key is taking time to define a budget and forecast and then review it on a regular basis.
- Competing Internal Priorities
In larger organisations, there is sometimes limited recognition of how decisions that benefit one area are detrimental to other areas. It’s the classic Sales fighting with Production or Accounts due to competing priorities or terms of trade. Giving away discounts, offering late payment terms or over-promising delivery timeframes, all of which affect the profitability and cash in the business moving forward. Alignment between departments and objectives needs to be addressed so that the company can succeed as one.
Business owners and managers who understand business financials can lead their teams and organisations more confidently toward ongoing growth and success.
For years running executive programs we have seen many methods to teach business financials with varying success. In our opinion, the Finance for Owners and Managers simulation is the best method of financial education to help owners and managers improve their financial understanding and decision-making.
The Finance for Owners and Managers course covers topics such as understanding financial statements, interpreting financial ratios, and analysing financial data. Participants learn to evaluate the financial implications of their decisions, communicate effectively with financial professionals, and contribute to risk and compliance efforts.
By empowering owners and managers with financial acumen, the course enhances understanding, fosters a more skilled and cohesive workforce, and ultimately helps with business success.
Click the link for more information on attending the Finance for Owners and Managers Program.