Would you drive with a blindfold on?
Of course you would not want to put your life in the hands of blind faith. This is exactly what a business owner does if he can not read and understand financial statements. Financial statements not only tell you where you business has been and wether it has survived or thrived but also where it is likely to be in the future.
So first and foremost financial statements are essential tools for understanding and running your business, yet that is not the only reason for them. The following true story will illustrate how much ignorance of this practical knowledge could cost you.
Let me tell you about my client David. Before he came to me as a client, he had a Pharmacy at a time when big competitors were coming in and starting to carve out his market, and David would have been more than happy to sell.
One day, a man walked in and said, “I want to buy this place.” Now if someone comes in and wants to buy your business, they usually make a generous offer because they are looking to buy instead of you having to sell. And a generous offer is what David got – an offer of $2 million. But the deal never went through. Why?
Because when the potential buyer asked to see the previous year’s tax return, David happily handed it over. (Now what you have to understand at this point is, a tax return essentially combines and summarizes two parts of a financial statement, your income statement and your balance sheet.) This tell’s anyone who reads it exactly how much money you’ve been making and where it’s been going.
If David had read and understood his return, he would have never have handed it over, because the buyer took one look and knew instantly that the balance sheet was bogus – the return showed millions of dollars for that year but an inventory of less than $10,000.
So the buyer looked at the return, he nodded, told David, “I’ll get back to you,” and left. David never heard from him again.
How could David have prevented the collapse of this $2 million deal ?
Simple. If he had understood that financial statements are the vital statistics of any business, he would have known what his balance sheet should have looked like. He would have made sure that his financial statements were accurate. And he would never have shown a bogus return to a potential buyer.
So what’s the moral of the story?
It’s that ultimately, you’re responsible for your own business and its financial statements. It’s fine to rely on someone else to prepare your financial statements, but you should never rely on anyone else to understand them for you.
Can you imagine a carpenter who doesn’t know how to use the tools of his trade? He wouldn’t be in business very long. Well, your financial statements are crucial tool that show you what shape your business is in and how to make it more profitable.
How can you expect your business to survive and grow if you don’t understand or know how to use the financial documents (tax returns and financial statements) that you’re paying your accountant or CPA to prepare?
I’ve spent the past 19 years educating my clients about their business and the financial reports that represent those businesses. Now you too can benefit from my experience with my new web site, please take advantage of my free income statement example so you can learn about this now.