The repercussions of not understanding our numbers in business

revenue growth, numbers

Financial literacy should be taught as part of growing up, as much as learning to drive a car is.  It’s the knowledge that ensures a family is thriving within its financial means, or that keeps an individual financially savvy and secure. When it comes to managing a business, especially a micro-business, financial literacy is as essential as the product/service knowledge within your area of expertise.

We are living in the age of microbusinesses, especially since COVID. Many employed professionals have turned to start their own businesses.  Whether trading as a sole trader, partnership, company or trust, financial literacy is crucial because a micro-team (comprising of one to four members) typically relies on its leader to keep the business healthy financially. If the leader doesn’t possess financial literacy, the boat that supports the entire team is at risk of sinking.

Leaders must know their numbers in order to make informed decisions on behalf of the team and ultimately for the business. The unfortunate truth is that many small business owners don’t know their numbers. Believing they’re not skilled at accounting, they outsource this aspect of the business and trust that they’re getting the best possible value.

When an entrepreneur gains a clear understanding of the business’s financial health, the right decisions become more apparent. The right timing for certain endeavours within the business also becomes clearer. It removes the guesswork and the wait-and-see approach because you can forecast the effects of certain actions and make your decisions based on those projections. For example, knowing when to channel working capital into growth or when to take on another team member is vitally important, there may be times when you need the financial cushioning more than the potential growth.

The crux of it is that a business owner that’s able to turn to the business’s financial statements, unit economics, and projections to assist in making difficult financial decisions, will be better equipped to drive that business forward.

What to do so that you don’t become another small business statistic?

  • Have a cashflow plan on how you are going to fund your business and your personal lifestyle in your first 12 months.  It is unlikely that your business will return the same salary you were earning, before starting your business, in the first one to five years.  It takes time and money to build a successful business.
  • Keep track of your numbers in cloud-based accounting software, like Xero, that allows you to see what is happening in real-time in your business.
  • Compare your expected cash flow from your plan against your actual cashflow and adjust your strategy accordingly.
  • Get advice.  Starting a business is hard work and there is a lot to learn.  Fast track your business by getting advice from people in the know.

Business owners need to understand that the decisions they make in their day-to-day operations must stem from knowing what their numbers are. This means not operating from incomplete numbers, poor numbers, or being completely in the dark. Outsourcing financial management is a positive step, however, the business owner must endeavour to work alongside their accountant or bookkeeper to understand the business’s financials and take ownership of its financial health.