Running a business is like steering a ship—every decision you make will either keep you on course or take you off it. For most small and medium business owners, understanding financials can feel like navigating through a storm without knowing how to get out of it. But what if I told you that reading your financial information like a CEO could make all the difference?
Whether you’re an entrepreneur with a growing business or a seasoned owner looking to get more out of your private company, the ability to understand your figures could mean the difference between success and mediocrity. This post introduces the basic concepts—from reading financials, to spotting problems early and making decisions based on data–just like those CEOs who achieve remarkable success and deliver their growth plans.
The Importance of Financial Information
Imagine trying to make business decisions without knowing your numbers. That’s like playing a game of darts while blindfolded—you might hit the target, but it’s mostly luck. Your financial statements are your business’s roadmap. They provide a detailed view of where it actually stands in terms of financial performance, giving you the power to steer in the right direction.
Your financial information, from cash flow statements to balance sheets, carries the key to your business’s financial health. Like most business owners your accountant or CFO probably handles the crunching of your numbers. However, you need to understand these documents in general terms so that you can make informed decisions.
Key Financial Statements Every CEO Should Know
There are three main financial documents every CEO, including you, should be comfortable reading:
Profit & Loss Statement: This tells you whether your business is making money or not. It shows your revenue, expenses, and net profit over a specific period.
Balance Sheet: This is a snapshot of your business’s financial position at any given point. It details what you own (assets), what you owe (liabilities), and the equity in your business.
Cash Flow Statement: Cash is king, and this report shows how much cash flows in and out of your business. It’s critical for understanding liquidity and ensuring you have enough funds to cover day-to-day operations.
How to Analyse Performance Between Measurement Periods
Now that you know the key financial documents, the next step is learning how to analyse performance between measurement periods. Successful business leaders don’t just look at their numbers—they compare them.
For instance, by comparing one quarter’s performance to the previous quarter, you can spot trends—positive or negative. Are your revenues increasing? What about your expenses? These comparisons help you understand your true financial health, spot potential issues early and adjust strategies accordingly.
One popular method is common-size financials, which helps you analyse performance relative to your revenue. By expressing every line item on your financial statements as a percentage of revenue, you can easily see where most of your money is going. For example, if your operating expenses have jumped to 60% of revenue from 50% last year, that’s a red flag you need to investigate.
How to Spot Problems Early
Financial statements don’t lie. If you know how to read them, they can alert you to problems before they become crises.
Profit Margins: If your profit margins are shrinking despite steady sales, it’s time to look at your cost structure. Are your suppliers charging more? Have labour costs increased? CEOs constantly keep an eye on their margins to ensure their business stays profitable.
Cash Flow Issues: A business might look profitable on paper but still struggle with cash situation. If your cash flow statement shows a downward trend, it could mean you’re overspending or not collecting receivables fast enough. This is where your CFO or accountant can help you dig deeper. It could be key to survival.
Rising Debt: If your liabilities on the balance sheet are creeping up faster than your assets, it’s a sign of potential trouble. Increasing debt without a corresponding growth in revenue or assets could put your business at risk.
Making Decisions and Taking Action
The numbers alone aren’t enough—you need to act on what they tell you. Here’s where successful CEOs differentiate themselves. At the first sign of trouble, they act immediately.
Review Costs: If costs are increasing at a faster rate than revenue, consider renegotiating with suppliers, automating processes, or cutting non-essential costs. Expense management is key.
Tighten Credit Policies: If cash flow is an issue, tighten your credit policies. You can reduce the time customers have to pay or offer incentives for early payments.
Boost Gross Margins: If margins are minimal, think about ways to increase them. This might involve raising prices, improving efficiency, or offering higher-margin products.
As a business owner, it’s easy to feel overwhelmed by financial data. But remember, this information is not just for your accountant. CEOs use their financials to take control, make strategic decisions, and drive their businesses forward.
Why Understanding Financials Empowers You as a CEO
CEOs don’t just glance at financials—they drill down into them. By doing so, they gain clarity on which levers they can pull to improve performance. Understanding your financial information allows you to:
Make Smarter Decisions: Whether it’s about expanding your team, investing in new technology, or opening a new location, the numbers will guide you.
Spot Problems Early: Your financials, coupled with key performance indicators, will often signal problems before they become obvious in other areas of the business.
Improve Profitability: By keeping a close eye on your numbers, you can identify inefficiencies and make changes that will improve your bottom line, including adopting tight expense management.
Communicate Better with Your CFO and Accountant: CEOs who understand their financials can ask better questions, hold more meaningful conversations about their financial health with their CFO and accountant, and agree on better strategies to improve the business.
You Don’t Have to Be a Financial Expert to Succeed
You don’t need to be an accountant or CFO to run a successful business, but understanding the basics of your financial information will put you ahead of the game. Like the best CEOs, once you’re able to analyse performance between measurement periods and spot problems early, you’ll feel more confident making early decisions and taking action.
So, the next time your accountant hands you a financial statement, don’t just file it away. Dive into the details, compare it to past periods, and ask questions. Remember, you’re not just running a business—you’re the CEO. And understanding your financials is key to making sure your business thrives.
Final Thoughts: Do You Need a Fractional CFO?
Small business owners can close the gap between what accounting firms (or do-it-yourself solutions such as QuickBooks) provide them and what they really need by engaging a fractional CFO.
Once you reach around £1 million to £2 million per year in revenue, a fractional CFO-level advisor is a must-have. These advisors are able to see the accountant’s reports from a business perspective instead of just a numbers perspective.
They have the knowledge and experience to interpret your financial information and give you the advice you need to make sound decisions and move your business forward. As your business grows and matures, it’s important to add the right people at the right time.
Are you ready for a fractional CFO? This is a good question to ask your business coach!
If you’d like help answering that question—or any other question you have about business—I invite you to book a complimentary 15-minute consultation call with me at www.TimeWithShane.com.