If your daily routine includes checking your sales numbers and bank balances, and using them to judge that your business is doing OK, you may be doing yourself a huge disservice.
Due to a lack of confidence in their financial system or not knowing how to do it any differently, many business owners run their business by their bank balance and sales numbers. If the numbers are going up, that’s good. If not, that’s bad.
Why is this so common among business owners? We’ve found that often the financial information they receive hasn’t been designed in a way to help them run their business or they lack confidence that the numbers are right.
Running your business by sales and bank balances alone could get you into hot water– and fast. There are a lot of things that get covered up in those two numbers.
Here are a few reasons why you need more than sales numbers and bank balances to run your business.
- Your bank balance could be over-inflated. If you have a bookkeeper or Controller making transfers between accounts, your bank balance may be artificially high because they are tapping your line of credit or transferring some money from savings to cover expenses.
- You are missing half the picture. Bank balances don’t include outstanding checks or upcoming liabilities. So, while you look at your account today and breathe a sigh of relief, that check mailed a few days before to pay a large vendor clears the bank or your payroll hits, your balance is suddenly a lot smaller tomorrow.
- You have to constantly keep in mind what’s coming. You can track in your head that when you sell a project you’ll get paid in X number of days, but multiply that by selling many projects to many people who don’t always pay when they’re supposed to. It gets complicated fast and we’ve seen clients spend against the same $100K they sold several times over. That’s why the manual calculations don’t serve you well.
- Sales numbers don’t tell the whole story. For those owners who use sales numbers in addition to (or in lieu of) their bank balances, you could falsely think you’re doing OK. Sales numbers alone will never tell you how profitable you are. You may be selling more and making less.
- You can rarely predict your cash runway. Even if you are pre-revenue, you still have to keep an eye on how long your cash will last until that next round of funding comes in or your product starts to sell. Without solid financials AND really good projections, you may think you can afford more than you actually can because you are flush with cash… today. Having a good team in place to do the financial projections, manage your balance sheet and work with your CPA to forecast tax liabilities, is critical to making sure you aren’t being short-sighted.
Using bank balances and sales numbers as your financial “pulse” can give you a false sense of comfort. Because they are just two data points in a sea of other information, they need to be put in context with your overall financial picture. Financials that are well designed along with key performance indicators will give you the full story on the health of your company. If these are things you find you need, discuss it with your CPA or reach out to us– we’d be happy to help.