By Rodrigo Laddaga, an EO Monterrey-Elumni, and Chairman of the board at E-Myth Spanish
After many years of working with thousands of small businesses, I have noticed that finance is often an area of weakness for small business owners. They say that the language of business is finance, but unfortunately, most small businesses do not fully understand this language.
What is even more critical, they don’t fully understand how to read their financial statements. The myth about understanding finances is that it is difficult and that only people with extensive formal studies in accounting, finance and management can understand finance well. This myth came about because most people who learn finances do so in college or technical schools, and most of these schools prepare their students to work in the financial departments of large companies, not to manage the finances of a small business.
Reviewing your finances without understanding what they mean is like driving a car without knowing what the car dashboard indicators mean. Imagine that the oil change indicator lights up and you don’t know what it means, so you continue driving the car. Eventually, your motor burns out and your car stops running! The results can be just as bad when small business owners and entrepreneurs misunderstand their financial statements.
I can tell you that to understand finance you only need to know how to do four things: add, subtract, multiply and divide. That’s all, you do not need more!
Below is a simple explanation of the three critical financial statements. But first, be aware that even if your accountant or bookkeeper prepares your statements for you, the best situation is for you to work in partnership with your accountant. Discuss with him/her how you want your financial statements presented, what level of breakdown you want to see, how much detail, in what format, etc. This can be critical to your understanding of what is happening in your business.