Financial Tools to Guide Your Business
The financial instruments in your business are similar to the instruments used in flying. As part of my previous employment, I flew an airplane, and on a clear day it was easy to fly VFR, or Visual Flight Rules. I would look at the instruments as a check and balance to make sure things were as they should be, but most of my attention was outside the windscreen. But on those days where the weather turned bad, as it did to me on a couple occasions flying through the Columbia Gorge, the instruments became critically important and ultimately life saving. Thankfully in my flight training, I had learned to fly under a hood, where I could not see outside for any reference points but had to rely on instruments. More than once those instruments saved my life and the lives of my passengers.
The instruments of your business are the financials. The P&L, or income statement, the balance sheet, and the cash flow projection, as well as the KPI’s, or key performance indicators. These are the critical instruments to your success, and I find too few business owners using them or paying attention to them, particularly the cash flow projection. It seems many business owners are flying VFR at their own peril.
The P&L is a look back in your business; in other words, it’s history. It is critically important, especially when used as a comparison tool to previous months, quarters and years. The balance sheet is a snap shot in time. Again, it’s a look back and important as a tool of comparison. Bankers don’t lend from your income statement. They lend from your balance sheet by applying a simple ratio called debt-to-equity to set a limit on how much you can borrow. The cash flow projection is the only instrument that looks ahead at what is coming in your business. This is probably one of the most useful tools we have, yet few business owners use it.
Pay attention to your financials-your P&L and balance sheet-and create a cash flow projection for your business. Work the KPI’s to see how healthy you are. I am attaching an article from a recent Vancouver, WA newspaper reinforcing this concept. If you would like to receive a cash flow template, reach out to me and I’ll send one along.
Don’t fly VFR with your business. Learn to use the instruments that will help navigate in all kinds of weather. Let me know if you need help or assistance.