I hate financial statements. Mention the word accounting and my eyes start to glaze over. I love math, numbers and large Excel spreadsheets — but there’s something about accounting that makes my brain shut down. So I turnover anything about financial numbers to my accountant.
And apparently, I am not alone in my thinking. For many small business owners, the phrase “financial statements” bring fear and anxiety in their hearts. To avoid dealing with the business’ finances, they delegate the financial responsibility to accountants.
According to the new book Accounting for the Numberphobic: A Survival Guide for Small Business Owners by Dawn Fotopulus, refusing to understand the finances of the business is one of the biggest mistakes entrepreneurs can make. In fact, it is not really undercapitalization that leads to small business failures; rather, the main cause why small businesses fail is management ignorance, a huge part of which is the lack of financial know-how. How can you properly steer your business if you don’t know where it really stands?
As Fotopulus explains, your accountant’s role is similar to your car mechanics. She writes,
CPAs know all about the metrics and gauges that measure business operations and health. They can provide plenty of helpful information for performing “routine maintenance” on your business and helping you avoid the crosshairs of the IRS. But at the end of the day, your CPA is not going to manage your business any more than your mechanic is going to drive your car. You are the one who needs to know your financial dashboard” so you can get where you want to go.
Fotopulus used to be one of the entrepreneurs who hate financial statements, and she paid the price for it going nearly bankrupt several times. To save her business, she promised herself that she will learn and understand her numbers to avoid repeating her failures. The book Accounting for the Numberphobic: A Survival Guide for Small Business Owners was written to help other entrepreneurs get over the fear of numbers and start learning how to read financial statements.
What the Book is All About
The book — in simple, layman terms — explains the financial dashboard’s three core gauges: Net Income Statement, Cash Flow Statement, and Balance Sheet. The book will teach you to ask the right questions about the financial health of your business:
- How to read a Net Income Statement (or Profit and Loss) in order to answer questions such as, “Are we pricing our products and services right?” and “Do we have the right mix of clients?” to “How can we work half as hard and make twice the money?”
- Strategies you can use in order to achieve break-even point, as well as help you make the determination whether your business has achieve self-sustainability
- Steps you can take to maintain a healthy cash flow from setting your payable policy to doing due diligence in selecting clients to invoicing strategies.
The first two chapters of the book are dedicated to helping you understand the basic financial concepts like cost of goods sold, gross margin, and others without drowning you in formulas and accounting-speak. The succeeding chapters focus on the practical usage of these financial terms and data, and how you can use these concepts in the everyday running of your business.
Going beyond providing technical definitions, the book explains why each concept is important for business and what kind of questions can be answered by looking at the metric and financial statement. In explaining what a balance sheet, the author enumerates some of the questions you want to be asking as you read a balance sheet, such as:
- Does the business have too much debt?
- Is it getting a good return on the debt it is carrying?
- Does the business have the right kind of debt?
- Are asset values growing or shrinking relative to liabilities?
- How much working capital does the business have?
- Does the business have too much or too little inventory?
At the end of each chapter, the author lists down the Key Takeaways, making it easier to digest the important ideas in the chapter.
Why You Should Read the Book
The book will teach you that:
- Your financial dashboard is the key to keeping track and to measure your progress. Learn to use it to make wise decisions.
- You run the business on gross margin, not on revenues. Work half as hard and increase profits.
- A small business can show a profit and still be bankrupt. The book offers a number of strategies to help you avoid this situation.
- You must collect on outstanding invoices – then proceeds to show you how to make this process painless.
The best part of the book is how the author clearly illustrates the financial concepts with real-life examples and case studies from other small businesses. Some of the examples include:
- How an interior design firm was able to identify potential income opportunities by analyzing their Net Income Statement.
- How a gourmet cupcake company looked at their Net Income Statement to increase their gross margins in order to pay all the expenses to operate a business.
- How a photography business looked at the average sale for each photo shoot to determine which type of service was most profitable
For accounting-averse people, these examples will make it easy to appreciate how empowering understanding financial statements can be and how useful it will be in decision making. An entrepreneur can make a faster decision and take action to correct any problems or grab opportunities when he or she can understand what the numbers mean.
The book is effective in showing me what I am missing by shying away from anything that has to do with accounting. It is definitely a book that will stay in my desk, as it will be referenced often.