I was reading an interesting column in the New York Times recently which offered advice on whether a small business owner should sell her business. Jay Goltz owns five businesses in the Chicago area and blogs for the New York Times. The woman had borrowed money from relatives to buy her business and was worried that she wasn't going to be able to pay them back. Jay was able to work through the finances with her and determine that she should be able to keep going and paying the family back was not going to be a problem.
Why didn't she realize this herself? She wasn't doing her accounting. She was relying on an accountant to do her taxes, but she really didn't know how her business was doing in between visits to the tax preparer. Beth and I see this more often than we would like. As we have said before, accounting is about much more than just having numbers to prepare your taxes. If this woman had someone helping her review her finances on a regular basis, she would have known that while her cash flow was a little tight, she was profitable and the cash flow was adequate to cover her expenses, taxes and loan repayment.
It so so important for all business owners to understand not only the profitability of their company, but the capital structure and cash flow as well. A profitable business can run into problems with cash flow which can sink them. Having too much debt or slow moving inventory can result in cash flow problems. While it is not necessary for a business owner to be able to read financials themselves, it is necessary for them to deal with the results so getting help interpreting them is crucial to the survival of a small business.
Many people aren't familiar with or comfortable with reading financial statements but this is something that can be learned. We try to review the financials with our clients every time we meet with them so they understand what the numbers are saying. It is always fun to see how much more they understand each time we meet. The time spent reviewing financials is often brief, but the small business owners we work with always feel better after our session is complete.