Financial Management: Learn the language and get in tune with your business

Kelly Masson November 10, 2022
person examining financial documents

How often do you think I hear these kinds of responses when asking about a client’s financial performance?

“Oh, I’m not good with numbers.”
“I’m not sure… My bookkeeper takes care of all the money stuff.”
“We just got last year’s financials from the accountant (now 11 months old), let me see if I can find them…”

Answer: A lot! It’s the equivalent of the client putting their fingers in their ears and yelling, “LA LA LA LA LA!”

And yes, I get it. Not everyone went to business school, and it can be intimidating to try to learn more about your finances. You’ve got more important things to do, right? Like increasing sales, dealing with suppliers, and handling a staffing shortage—you know, running your business? 

But here’s the thing—If you don’t know the numbers behind your business, you’re not really running a business, it’s running you.

It’s nearly impossible to grow your business without knowing the financial nuts and bolts as you scale up because you don’t know what you’re working with. It’s like trying to make something for dinner without knowing what’s in the cupboards. 

In today’s business skills post I am going to cover some key reasons you should make an effort to understand your financials, how often you should review them, and how you can put a plan into action. 

For more on the actual nitty-gritty details on how to improve your financial knowledge, check out our guide: Financial Management for Small Business.

Why should you make an effort to understand your business finances?

Data entry vs. financial management

Some entrepreneurs are pretty hands-off when it comes to financial management. They rely on their bookkeeper to enter the expenses and revenues into accounting software and rely on their accountant to prepare the financial reporting and taxes and review it with them once a year. 

These activities are important pillars of your business, but if you limit your financial management to this level of data entry and annual reporting, it can leave a giant gap. What really makes your data meaningful is when someone actually looks at the numbers on a real-time basis, analyzes them, and uses that information to inform decision-making and business strategy. 

This is the difference between data entry and financial management. The good news is, you don’t need to be a numbers whiz to understand your numbers. You just need to be curious and have the right people to help.

Why you need to make time for financial management

Okay, so you know you should be spending more time watching your finances. Here are some (hopefully) compelling reasons to invest the time.

It will give you information for decision-making:

Financial management can help you:

  • Track your margins: Over time, your expenses can start to creep up (especially in today’s inflationary environment). By watching your finances, you will have a better idea of how much profit you are making from each unit you sell, which will help you decide whether you need to increase your prices.
  • Monitor trends: Sometimes it can be easy to go into autopilot with some things, like paying invoices and signing off on payroll. If you look at your financials regularly and compare them to past performance, you can monitor trends and identify when a change is needed. Perhaps your ingredient costs are way up? Or has your phone bill increased? Catching this earlier will give you more time to react and adjust. Likewise, maybe you notice from your reporting that certain times of the year are busier than others—how can you capitalize on that trend for next year?
  • Understand your ability to make new investments: Perhaps you are dreaming of opening a new location or hiring another staff member. Before you take the leap, your financials will be a great source of information to tell you if now is the right time.  

It will help you understand your cash needs:

Arguably, the number one financial issue faced by most entrepreneurs is balancing cash flow. You may have had a record month in sales, but if you also just placed a big inventory order and paid your taxes (oh, and don’t forget you had to fix a leak in the ceiling), you may find yourself out of cash. 

This is one of the main reasons entrepreneurs should make time for financial management. By reviewing your actual and forecasted cash inflows and outflows on a regular basis, you can plan for future cash crunches and make arrangements to bridge the gap in advance (like calling your lender for a business loan or line of credit).

It will help you stay friends with your lender

Having your financial information at your fingertips will help you maintain good relationships with the partners you want good relationships with. For example, if you want to apply for a loan, your lender is going to expect up-to-date financial statements. 

If those aren’t available, you might have a hard time accessing financing. Likewise, once you do get a loan, your lender will expect regular reporting—and it’s always a good idea to stay in your lender’s good books.

It will help you manage payables and receivables

Staying on top of your finances will also help you keep strong relationships with other partners, such as your suppliers. By reviewing your finances regularly, you can monitor payments to your vendors that have gone unpaid and strategize on how to settle the account. You can also keep on top of who owes you money and can follow up to inquire as to when you can expect payment.

How often should you review your finances?

Most entrepreneurs already do an annual review—but aside from that, how often you review your finances will depend on the nature of your business and the timing of your revenues and expenses. Every entrepreneur should be sitting down to review the books at a high level at least every month, with a deeper dive on a quarterly basis, and a very deep dive on an annual basis. 

Here are some other considerations:

  • Weekly review: If you are a volume-based business like a restaurant or retail store—you absolutely should be looking at your sales on a weekly basis. If you’re working with cash and credit cards, you will already be doing settlements at the end of each day—so find a way to track that information. Your point-of-sale system may already provide reports for you, so use them! Also, be sure that you understand what’s included in your reporting. Does it include shipping and GST? That’s not revenue, so take that into account.
  • Monthly review: On a monthly basis, all businesses should take the time to make sure all revenues and expenses are up to date and prepare a report that tracks your most important metrics. Many of your fixed expenses will be paid on a monthly basis, so this level of reporting will give you a full view of that month’s performance. This review doesn’t have to take a lot of time, and the more you do it, the faster you will get at doing the monthly review.
  • Quarterly review: The next level of review is quarterly. This is the time for you to meet with your accountant (if you have one) to discuss higher-level trends and results and decide whether the results necessitate a change in strategy. Go back to your goals for the year—are you on track based on how things are going so far? If not, what are the highest potential opportunities to get back on track?

How can you get started to improve your financial management today?

Compile your data

Good financial management starts with good financial data entry. Maybe you are great at entering your revenues and expenses into an excel sheet already, or maybe you keep all of your receipts in a file somewhere for entry by your bookkeeper. That is a great start! However, for you to get the most out of that data, you also need a way to compile and look at the data in a way that is timely and meaningful. 

Use accounting software

This is why it’s so critical to consider using accounting software—AND (crucially) to learn how to pull reports from it.  If you are using excel, you are probably missing out on the powerful ability of software to slice and dice and compile your data. It can handle all the arduous tasks that you might be doing by hand. And how much money are you saving by not having a $20 subscription? How much is your time worth?

If you are working with a bookkeeper, chances are they already have you set up on accounting software. That’s great! That means that you can start using the software too. Ask your bookkeeper to walk you through the process and pick a few key reports to look at. Make a calendar date with yourself to pull these reports, and then look at them. This investment in time will be well worth it.

Choose your financial advisors wisely

Lastly, the most important resource you will have on this journey are your financial advisors, so choose them wisely. Before you choose a bookkeeper or accountant, make sure they have an understanding of your particular industry—this can make a big difference. 

Make sure you feel comfortable with them—you should feel okay asking a ‘silly’ question, and they should be able to communicate with you without using too much finance jargon. You also want to make sure that they will be available to you when you need them. Some financial professionals focus on working with small and medium-sized businesses, which can be a better fit than going with a large firm that may not be able to provide the support you need.

The most important thing is to get started! I hope this information helps give you the confidence to take a more hands-on approach to your finances. Just remember to stay curious!

About Kelly Masson

Kelly Masson is a WeBC Business Advisor (BA) based out of Nanaimo. She understands the impact small businesses can make on individuals, families, and communities and is thrilled to work with entrepreneurs as they pursue their unique missions. As a BA for WeBC, Kelly’s favourite question to ask clients is, “is the juice worth the squeeze?” In other words: do you know if your efforts are getting results? If you don’t know, she will help you find out!

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