I asked one business owner what he thought the cause was for so many corporate bankruptcies, especially among SMEs. He believes many entrepreneurs misjudged how far they could play around with the dollar and not get burnt. They thought they could borrow money, make a killing through a few deals and pay back within the agreed period. “Unfortunately”, the business owner said, “the green dollar does not grow like mushroom the way its predecessor did, even if you place it on a pile of cow manure.”
Speculating in the dark is what some business owners have been doing with their finances. Others have been accumulating losses without realising it, with supplier credits and loans covering up the holes. The underlying problem seems to be a lack of appreciation of how money works; in other words, poor financial intelligence.
The majority of entrepreneurs are not financial experts. That by itself is not surprising nor is it necessarily a problem; many entrepreneurs are experts in their specialised fields, be it engineering, IT, motor vehicle repair or fashion design. It becomes a problem when you avoid the numbers. I know a number of business owners who regard any form of financial report with fear, insecurity and anxiety.
Neglecting the numbers is dangerous. You can run up losses without realising it, until you find yourself unable to meet salaries or rentals, pay suppliers and creditors, and even start dodging your bank manager when a loan becomes due. Dishonest employees will likely take advantage of your poor financial appreciation to dupe you or steal from you.
Even if you don’t get into the worst case scenario of bankruptcy, poor financial intelligence costs you in the form of missed opportunities when you fail to use financial data to make strategic decisions.
HOW TO IMPROVE YOUR FINANCIAL INTELLIGENCE
The first step in improving your financial intelligence is to be willing to learn. Find a financial management mentor, whether an accountant, a consultant or even your bookkeeper. Ask as many questions as possible and take every opportunity to learn something new. Even if you hire someone to do your financial management, as the owner of the business and the one who stands to lose the most, you must be in the know about your business’ finances.
There are numerous programmes designed to help entrepreneurs know the essentials of financial management. For those who don’t like reading a lot and would prefer face-to-face interaction, there are training courses, like the “Finance for Non-financial Entrepreneurs” which SME BusinessLink has organised for June 24.
With a financial record capturing system in place and working, you should be able to generate essential financial reports, such as income statements to reveal profit or losses made, balance sheets to show the financial standing of the company and cash flow statements to show how much cash has been made and used during the period. You will also be able to make projections for the future and be aware of losses or cash flow problems before they happen. Decisions can then be made to correct problem areas, such as increasing prices or reducing expenses when profit margins are too low; or reducing stocking levels or shortening credit terms when a future cash gap has been revealed by the cash flow projection.
With accurate information at your disposal, managing the business and making strategic decision will become easier. You will be able to plan your growth more confidently. More importantly, you will be able to pay important bills, taxes and loan repayments on time and thus avoid the worst case scenario that has forced so many other businesses to go under.
Do you have a business success story or some piece of advice? Please share with other entrepreneurs by emailing it to me. Best wishes in your business.
About the Author
Phillip Chichoni is the co-ordinator of SME BusinessLink, an insights, opportunities and resources sharing network for SMEs and entrepreneurs. His email address is email@example.com.