You can’t run your business by looking at your bank balance

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You can’t run your business by looking at your bank balance

By Anna MaskerIn standard4th August, 2017

Is this how you check on the health of your business?

Step 1:

  • Log in to your bank.
  • Check the balance.
  • Do a few small calculations in your head.
  • Breathe a sigh of relief or panic and make a few phone calls.

Step 2:

  • Check sales numbers.
  • Do a few small calculations in your head.
  • Breathe a sigh of relief or panic and make a few phone calls.

Step 3:

  • Repeat Steps 1 & 2 the next day.

Sound familiar? Either due to lack of confidence in their financial system or lack of knowledge of how to do it any differently, many small 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?   Either they don’t know how to use their financials to run their business, or they do know, but don’t have confidence in the numbers the accounting department is sending them.

Running your business by your 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 shouldn’t use sales and bank balances to run your business.

  • Your bank balance could be over-inflated. Especially 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 money from savings.
  • You are missing half the picture. Bank balances don’t include outstanding checks.  So while you check your account today and breathe a sigh of relief, tomorrow payroll may hit or the large vendor payment your accounting department made clears the bank, decimating your balance.
  • Sales numbers don’t tell the whole story. For those owners that use sales numbers in addition to (or in lieu of) their bank balances, you could be falsely thinking you are doing OK.  Increasing sales numbers don’t tell you if those sales are profitable or not.  You may be selling more and making less.
  • You can’t accurately predict future cash flows. Yes, you can probably do calculations in your head, if you sell a project today you’ll get paid in X number of days.  However, there are a lot of ins and outs in your bank account that happen before you get paid.  We’ve seen clients spend the same $100K they sold to a client three and four times over.  That’s why the mental calculations don’t serve you well.

Using bank balances and sales numbers as your financial “pulse” is not the way to run your business.  You need to understand how to read and interpret your financials, which tell the whole picture on the health of your company.  Sales and bank balances are two data points in a sea of other information, and need to be put in context in your whole financial picture.

If you don’t know how to read your financials or need help interpreting them, or if you don’t have confidence in the numbers you are getting from your accounting department, contact your CPA or reach out to us– we’d be happy to help.

Contact Us

90 East Halsey Road
Suite 327
Parsippany, NJ 07054

Tel: (973) 659-1430
Fax: (973) 659-1490
info@profitpointconsulting.com

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