Dangers of Financial Ignorance

We all love to get more new customers. Selling those customers a lot of products or services improves revenue. You can really ring that cash register if you get a lot of new customers and sell them all a lot of great stuff. Then, you get repeat business from lots of those customers and you've got the makings of a great selling machine.

If you don't understand how to read, analyze, and use your financial statements, you will be at risk of running that machine deep into the ground. You must know where your money (expenses) is going. Do you ever take the time to review your income statements? Do you even have income statements? For those of you who aren't sure, an income statement is nothing more than a detailed report of your revenues and expenses. It tells you what you are spending your money on (and how much) and it compares it to how much money you are making. The bottom line of this report is Net Income (or Net Loss if you aren't paying attention). For operational purposes, this is (in my opinion) the most important piece of financial data that you can use. A program like QuickBooks will let you enter invoices and print checks from your computer. It also lets you enter in your revenues. As soon as checks are printed, and at any interval, you can immediately run an income statement. You can view these as often as you want to - daily, weekly, and absolutely monthly.

To make sure your operation is making money, you should graph this information at regular weekly and monthly intervals. Graph your expenses and work like crazy to minimize these, except for anything that helps your company grow. Graph your incoming revenues and work like crazy to increase money coming into the organization. Finally, graph the bottom line - net income / loss. It is irresponsible management not to know where you are financially at all times. The income statement provides you with this data.

On the income statement, your expense categories need to be detailed enough for you to measure each individual category and find ways to reduce those expenses. A simple report with nothing more than a Total Expense number is practically useless to you operationally. With this only, how would you begin to figure out if something is wrong or where you have problems? So, give yourself plenty of detail, and certainly enough to effectively manage your financial operations.

You can not be blind to expenses, revenues, or net income. This is financial ignorance and this kind of ignorance will surely run your company into the ground.