Without a Financial Scorecard Your Small Business is Destined to Fail
“If winning isn’t everything, why do they keep score?” – Vince Lombardi. That is one of my all time favorite quotes. Now, I know that there is debate on whether or not we should be a society that stresses winning over doing your best, but when it comes to business, unfortunately, doing your best is not going to keep the doors open. If you are not beating your competition and not making money then the likelihood of your business surviving is at stake. There are several ways you know if you are winning but the best way to keep track is to have a financial scorecard. What exactly is a financial scorecard and what does it mean for a small business? That is exactly what we are going to answer and my hope is to have you understanding enough after this post that you stop what you are doing and start your “scorecard!”
In business numbers are how you are judged and it doesn’t matter how many innovative products you bring to the market if you do not know your numbers you are going to struggle and could be destined to fail. Here is a simple way to look at what your scorecard is and I like to make things simple. Think of your scorecard as after each month, quarter, or year as if you are winning a game. If your sales are higher than your costs you are more than likely winning. Now, before you go saying, “well duh” there are a few more components that you need to consider, but the main point here is your scorecard is the life of your busy and how healthy and strong it is.
So, if your financial scorecard is the lifeline to your small business then what does it consist of? The financial scorecard consists of four components and they are; PNL ( Profit and Loss Statement), Balance Sheet, Cash Flow Statement, and your Budget.
Now that we know what areas consists of our scorecard let’s explore each one just a little bit more.
PNL (Also known as your Profit and Loss statement) – The PNL measures the financial performance of the business for a given time period. The PNL will consists of revenue line items and expense line items. When you have those two set up you then take your revenue and minus it from expenses to get your profit (REV-EXP=Profit). Pretty simple but most small business owners just look at their bank statements each month to see if it is going up or down. Spend the time to write out each month your revenue and expenses. Knowing what areas are bring in you more income or is costing you more will help you budget better and also focus more on either cost reeducation or revenue enhancing strategies!
Balance Sheet – The Balance Sheet is composed of three things; Assets, Liabilities, and Owner Equity. The equation for this is Assets – Liabilities = Owner’s Equity. The balance sheet is used to score the financial condition of the small business at certain point in time. The problem that most small business owners face is that their Liabilities tend to be higher than their assets, which leads to negative cash flow.
Cash Flow – I am sure you have all heard the quote “Cash is King” and it is very true in business, so theCash third component to the scorecard is the cash flow statement. We have all heard the statistics of small businesses failing in the first years of existence and one reason for that is the lack of cash on hand to keep the business afloat. It is important to know your “cash burn rate”, which is simply how much cash you are going through in a specific time period. In order to find out your cash flow and burn rate you need to do the following equation:
Income or Revenue
COGS( Cost of Goods Sold)
It is important to set this up on a monthly basis because each month things change and so does your cash position. For example, one month sales might be 100k and the next month they may only be 50K but your fixed expenses and salaries did not change, which could allow you to have a smaller cash position. There are very few business who will not experience a cash gap at some time during a business year, so it is important to have the cash flow statement to plan accordingly.
Budget – The final and fourth component to the scorecard is the Budget report. It is important to forecast out your revenue and expenses. The budget helps you mange the planned future performance of the small business and also gives you insight as to how well you are predicting outcomes. A lot of times I see small business owners just guess on revenue or expenses because they say that how do I know what is going to happen in the future but this is the wrong thought process.
Let me give you an example, I am sure most of you have heard of Southwest Airlines, and some of you may know that they have put together one of the longest stretches of positive earnings for a public company. Now, remember this company is an airline and as most of who drive we see gas prices go up and down all the time, so then how do they predict gas prices in their business. Well, they hedge their bet. They have people who look at the markets and buy gasoline futures months in advance so that when the price becomes volatile because of some event they do not get caught up in it. As a small business owner you need to do the same. If you buy material know when the material is more expensive and buy more at the current levels. Hedge your bet and forecast into the future.
Alright, I kind of got off track and will probably do a post just on “hedging” in the future but for now go set up your scorecard and start keeping track. Know your numbers! Start having a MBN ( Manage by Numbers) approach to your small business.
To Your Success,
If you find this post helpful share it or comment on it.