Here’s a simple test
Recently, I was talking to the owner of a successful multi-million-pound business.
He was worried about how profitable the business looked in his year-end accounts.
“Can I reduce the profit,” he asked, “by buying another machine before the end of the financial year?”
It sounded like a perfectly sensible question. Except it wouldn’t have worked.
Buying the machine wouldn’t have reduced the profit shown in the accounts because it would have been treated as an asset, not an expense.
Now, this wasn’t someone who was inexperienced or bad at business.
Quite the opposite. He’d built a successful company employing dozens of people.
Still, he didn’t always understand his financial information as well as he thought he did.
And he’s far from alone.
I’ve had another business owner with more than 30 employees ask me, “What exactly are management accounts?”
I’ve spoken to people who were puzzled as to why their business could be profitable, yet still have cash flow problems.
And it’s not unusual for us to ask a client for their work in progress, only to discover they don’t really understand what it is or why it’s important.
It’s not their fault.
The reality is that most business owners were never taught finance.
They’ve learned how to build products, win customers, recruit great people and grow profitable businesses.
Very few have ever been taught how to interpret the financial information they’re given each month.
Which brings me to a question.
Do you really understand your numbers?
And be honest with yourself.
I don’t mean, can you read a profit and loss account?
I mean, do you understand your finances well enough to make good business decisions?
Here are a few questions to ask yourself:
- If your profit increased but your bank balance fell, would you know why?
- Do you understand the difference between profit and cash flow?
- Do you know the difference between an expense and an asset?
- When your accountant asks for work in progress, do you understand why?
- When you receive your management accounts, do they help you decide what to do next — or do they simply tell you what happened last month?
You don’t need to know everything your accountant knows.
And you certainly don’t need to become an accountant.
But you do need to understand your numbers well enough to understand how your business is really doing financially, what might happen next, and make confident business decisions.
In my next email, I’ll share a few simple ways to build that understanding. Don’t worry – it doesn’t require an accounting qualification!
In the meantime, if there are aspects of your finances you’ve never quite understood, don’t just live with the uncertainty.
At Insight, we don’t just help clients produce the right financial information. We help them understand it, so they can use it to make better business decisions.
If that’s something you’d like help with, we’d be delighted to have a conversation. Simply email garry@insightassociates.co.uk or call us on 01279 647 447 to find out more.
Kind regards,
Garry
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