• 16 Dec, 2022
  • Admin

If you don't know your numbers, you don't know your business. This statement may seem obvious, but it's surprising how many business owners and entrepreneurs overlook the importance of tracking and understanding their financial data.

Small business owners have been struggling to keep their businesses afloat, often relying on gut instinct and guesswork to make decisions. They are not equipped with the financial knowledge to understand the inner workings of their businesses, and are constantly taking risky gambles just to keep their doors open. As a result, their businesses are held back and unable to reach their full potential. It is a heartbreaking and overwhelming reality for these hardworking individuals, who only want to see their businesses thrive.

And for those employees at large companies and institutions limit their involvement to only the tasks that they were hired to do, leaving the financial workings of the organization to be handled by accountants. This can be a shortsighted approach, as understanding the financial health of the company or institution can help employees make more informed decisions about their work and potentially identify ways to improve efficiency and profitability. Ignoring this important aspect of the business can also leave employees feeling disconnected from the overall mission and success of the organization.

The truth is, anyone involved in any type of business, whether you own a small business or are employed in a business or large institution, you need to know how to read financial statements and financial information. These financial statements and information will give you a pulse on the health of your business and allow you to make projections for the future.

Karen Berman, Joe Knight, and John Case, authors and financial advisors in business, have shared important financial numbers that everyone needs to know in their book titled "Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean." They also explain in simple language and through examples how to understand the three financial statements that everyone needs to know how to read.

In this article today, I will share with you the top ten benefits of knowing how to read financial statements and the three financial statements you need to know how to read.

Below are the top ten benefits of knowing how to read financial statements:

  1. Knowing the direction of your business. If you own a business, the only way to know the direction of that business and to know where every cent of that business is going is through financial statements. If you don't have financial statements, you won't know where the business is headed and you'll be conducting business by guesswork, which will eventually lead to the demise of the business. Financial statements clearly show whether the business is making a profit or incurring a loss and whether it is growing or declining.
  2. Dealing with "bad actors". There is a strong belief among some small business owners that there are people who have ways of siphoning money out of businesses. So they're careful about who they hire and when they do. This belief is unfounded, but financial statements can help to expose any such "bad actors".
  3. Making informed decisions. Financial statements provide important information that helps you make informed decisions about your business. For example, if you want to invest in new equipment, financial statements will show you whether you can afford it and how it will impact your business.
  4. Applying for loans. When applying for a loan, lenders will ask for financial statements to see if you are a good credit risk. Without financial statements, you will not be able to provide this important information and it will be difficult to secure a loan.
  5. Negotiating with vendors. Financial statements can help you negotiate better terms with suppliers and vendors. They can see from your financial statements whether you are a financially stable company and whether you are able to pay your bills on time.
  6. Attracting investors. If you are looking for investors, financial statements will show them the financial health of your business and give them the information they need to make an informed investment decision.
  7. Meeting legal requirements. In some cases, it is a legal requirement to provide financial statements. For example, publicly traded companies are required to file financial statements with the Securities and Exchange Commission (SEC).
  8. Improving business performance. By reading and analyzing financial statements, you can identify areas of your business that are performing well and areas that need improvement. This can help you make changes to improve the overall performance of your business. 9. Comparing to industry benchmarks. Financial statements can help you compare the performance of your business to industry benchmarks. This can give you an idea of how your business stacks up against competitors and help you identify areas where you need to improve.
  1. Staying organized. Financial statements help you stay organized and keep track of your financial records. This is important for tax purposes and for making informed business decisions.

The three financial statements you need to know how to read:

  1. The balance sheet: This statement shows the financial position of your business at a specific point in time. It lists your assets (what you own), your liabilities (what you owe), and your equity (the difference between your assets and liabilities).
  2. The income statement: This statement shows your business's profitability over a specific period of time (such as a month or a year). It lists your revenues (income) and your expenses, and shows your net income (profit or loss) for the period.
  3. The cash flow statement: This statement shows the movement of cash in and out of your business over a specific period of time. It shows the sources of your cash and how it was used, and helps you understand the liquidity of your business (how easily you can pay your bills).

So, just for a reminder, what kind of numbers should you be tracking?

  1. Revenue: This is the money your business brings in from selling products or services. It's important to track your revenue over time to see how your business is growing and to identify any trends or changes in customer behavior.
  2. Expenses: It's also important to track your expenses, including things like rent, salaries, and supplies. This will help you understand where your money is going and identify opportunities to cut costs.
  3. Profit: Your profit is the difference between your revenue and expenses. It's important to track your profit over time to see how your business is performing financially.
  4. Customer acquisition cost: This is the amount of money you spend to acquire a new customer. It's important to track this number to understand how much it costs you to grow your customer base and to see if you are getting a good return on your investment.
  5. Return on investment (ROI): This is a measure of the profitability of an investment. It's important to track your ROI on different projects and investments to see which ones are providing the best return.

By tracking these and other key numbers, you can get a clear picture of your business's financial health and make informed decisions about where to focus your efforts. So, don't neglect your numbers – they are the key to understanding and growing your business.

In conclusion, it is crucial for business owners and employees to understand financial statements and financial information. This understanding can help business owners make informed decisions, secure loans, negotiate with vendors, and understand the health of their business. EMA ERP is a comprehensive enterprise resource planning solution that is tailored to meet the unique needs of businesses operating in the African market. With EMA ERP, you can easily track and manage your financial data, ensuring that you have a clear understanding of the health of your business. By using EMA ERP, business owners in Africa can confidently navigate the complexities of the African business environment and make the best decisions for their businesses.

Share This