Many business owners don’t spend enough time examining finance
"There comes a moment when you have to stop revving up the car and shove it into gear." -- David Mahoney
“Cheery little column,” my editor said recently when he read of the rampage of Pestilence and War, the first two horsemen of the Apocalypse. Yet, it’s no exaggeration that middle market business leaders pay little attention to business finance. You may say that’s not true – “I look at my monthly financial statements” … “I know what they say” … “We’re on top of things.” Maybe, but I have seen little evidence that executives have worked nearly as hard to unleash the power of business finance as they have to learn more about marketing programs or social media or lean manufacturing techniques.
If your first inclination is to run toward the exits when business finance is mentioned, it’s only because you’ve been led to believe that these principles are understandable only by seasoned and studied financial professionals. Hogwash.
Yes, you’ll have to devote some time and attention to it, but these principles are very accessible and you can learn them, certainly well enough to work closely with your financial team to make sure everyone’s paying attention to the right things. If you’re going to be a successful business executive, you can’t ignore these principles … and if you keep reading, you’ll see that I’m willing to help you.
So, yes, the Four Horsemen are still tearing across the landscape. Last time, I noted that there are four occasions when the lack of attention to business finance slaps us upside the head, too late, of course. Pestilence bears the plague of unexpected cash shortfalls that often appear just before payroll is due. War breaks out when you’re trying to grow without adequate cash resources.
The Black Horse travels in third position among the Horsemen, representing Famine, and it’s a famine of great proportion when you can’t access external financing resources.
For our purposes, we’re mostly talking about bank financing, although in some cases, outside equity financing may be required. Even if the carnage wrought by Pestilence and War drives your soldiers to the battlements, somebody still needs to plow the fields. Famine intensifies the plague because the company can’t access outside financing, which often results from inattention in another area … that dastardly balance sheet.
Most business owners spend about 85 percent of their time on the income statement and pay little attention to the balance sheet. They understand the concept of the P&L – revenues come in, expenses go out, profits are left over – but where they’ve gone and why they don’t result in an equivalent amount of cash or net worth on the balance sheet is a riddle wrapped in a mystery inside an enigma for most executives.
So, it’s exasperating when your banker asks about the balance sheet because for most executives, the importance of debt coverage, or debt/equity and liquidity ratios, is bewildering. What do they mean? Doesn’t most everything happen on the P&L and the balance sheet is just the result of that activity? (Is that why the horseman astride the black stallion carries balancing scales?)