This is Part 5 in our “Know Your Numbers” series, which will help you read your financial statements, better understand the numbers that drive your business and ultimately make better decisions.
In Part 4, we reviewed some common systems used to capture key performance indicators (KPIs) for your business. Once you gain insights into your company’s performance, you’re better armed to make the decisions necessary to keep your business moving forward.
Business owners must make important decisions all the time, from day-to-day, tactical choices to big, strategic choices that affect the future of their company. Here are a few of the key decisions that are faster and easier to make (and often produce better results) when you have good financial information to work with.
Entrepreneurs have big visions of what they aspire to see in the world. It’s these kinds of crazy ambitions and dreams that have fueled innovation in our culture and society. However, before they can realize their visions, a company must rally their team around a shared mission: how they plan to make a difference in the lives of their customers, employees, vendors, and community.
Your numbers are a critical part of your company mission because achieving it will require financial investment. For example:
- Your goal for attaining a certain number of customers will drive your decision for the kind of investment required to attract and retain those customers.
- Your goal for job creation and influence locally, regionally or worldwide will make you think about the funding required to get your business off the ground and hit certain milestones.
With financial data at your fingertips, you can better understand how to invest your funds to make your mission and vision a reality.
Your mission will also influence your organization structure. For instance:
- If you need funding from personal savings or loans from friends and family, you may choose to retain 100% ownership of your company.
- If you need to raise money from outside sources or multiple parties, a partnership might be the right structure for you.
- If your mission requires you to move fast and make a large investment, you may need to organize your company as a corporation with different stock rights and privileges.
As you build your financial budget, use that data to analyze the kind of investment that will be required, which, in turn, will help you select the organizational structure that makes the most sense for your situation.
Team members are the lifeblood of many businesses. These are the individuals who have bought into your company mission and committed their valuable skills, time and creative energy to help you achieve your goals.
Investing in good people increases your growth and influence. Your numbers help inform staffing decisions, such as:
- How much to invest
- When to invest
- How to recruit and hire
- How many people you can hire
- Compensation that is attractive for employees and financially sustainable for your company
As you work through big decisions in your business, you will formulate a budget to support those goals and objectives. Proper financial recordkeeping, accounting and reporting provide the framework to guide those decisions and see their financial impacts. With your budget in place, you can better understand your costs and realistic profits to help inform your pricing. There is a unique art and science to pricing. Getting the science part right (in other words, getting your financial numbers in order) will set you up for success as you navigate the art of pricing.
This cycle of building financial expectation with a budget, tracking and measuring your actual activities with recordkeeping, then reporting and analyzing your financial results with reporting will better inform your decisions around pricing, cost structure and desired profits. The patterns and results you see will also influence your daily and weekly financial decisions, such as when and how to make purchases and collect payments.
From big, strategic decisions about your company’s direction and structure, to daily and weekly decisions about cash flow and work priorities, you’re constantly making choices that impact your company’s short-term and long-term success. With sound financial systems that can provide you with data and insights, you’ll find that you can make faster, easier decisions that often lead to better outcomes.