By Charles H. Green
We’ve all been there before – get to working on a promising loan application with all the right signs. Inevitably the talk turns to financial projections and the borrower starts changing the subject. It takes a while, but finally you corner them to admit they “aren’t too good with numbers.”
What does that mean? It’s not rare to be handed financial statements prepared by a CPA, and still sealed in an envelope that delivered them months before. An uncomfortable large number of business owners simply try to drive the financial side of their business based on what their checking account balance is. If it’s positive, they must be profitable, right? So the theory goes.
I contributed an article to Entrepreneur Magazine recently to raise this point directly to the folks that need to see it: small business owners. Over my lending career I’ve learned that many small-business owners have an astonishingly low understanding of basic accounting. Some cannot distinguish cash flow from profitability.
Compiling, tracking and analyzing financial results is the most tedious part of business ownership, but it’s necessary in order to establish that a business is working as it should. Beyond profitability, it’s vital to understand the relationship between revenues and costs as well as expenditures and receipts. Great products don’t have much value if you can’t sell them for a profit.
The bottom line for them: if you don’t have and understand you financial metrics, you will forever be blocked from bank funding. Count on it.