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Monday, Nov 11th

African startup advice series: mastering the business of money

African startup advice series: mastering the business of money.

One of the most important areas of business is one that business owners fear most. The numbers.

You see, most business owners are "technicians". They are very good at what they do – a great software programmer, an experienced telecoms guru, or an importer or exporter of a brilliant product.

But how well do they understand their finances – the numbers in their business?

Many business owners get away with a lack of accounting or finance knowledge by hiring an accountant, or outsourcing the bookkeeping to someone who understands it.

But that person is not good at doing what the business owner does. They can only ever record historical financial information and tell the owner what position the company is in today. They don't necessarily have the understanding of the business to advise how to change the status quo.

Don't get me wrong. Outsourcing the numbers is a great idea... it frees the owner up to run the business. But the task of interrogating the numbers has to rest with the business owner. You can't make good business decisions unless you understand certain key numbers in your business.

Would you fly in a plane if you overheard the pilot say "I am not exactly sure what all the lights and dials in the cockpit mean!" As a business owner, you are the pilot of your plane. If you don't understand what your dashboard and control panel – the financials – are telling you, your business is destined to crash and burn.

There are 3 critical dials in the business cockpit that comprise what we call "financials." You need to make an effort to understand your balance sheet, income statement and cash flow statement.

The Balance Sheet is like your "directional gyro" and displays the company's heading. It is a snapshot in time at the date that it is generated. It provides high level company health information for determining if the company is improving or deteriorating.

However, looking at a balance sheet doesn't give you all the information needed to fly the plane or guide your business. It may tell you how much cash or retained earnings you have, but doesn't tell you how you got there.

That is why the Income Statement is the next vital instrument in your cockpit. The Income Statement can be compared to the Airspeed Indicator. By recording your airspeed during the entire journey, you have a history of how efficiently you controlled your plane and fuel usage to arrive at your destination. The income statement records cost control and tells us how efficient we are at turning revenue (sales) into profit.

And finally, the Cash Flow Statement is the most neglected instrument in the cockpit. This can be equated to your cockpit altimeter, and shows how much altitude you have. You see, no matter how well you fly the plane, if you run out of altitude, you will die. Similarly, you can be profitable, and still run out of cash. Turnover is vanity, profit is sanity, cash is reality.

Your financial statements enable control and give us levers so that we can steer the plane rather than just be blown around. They help us be more effective and more efficient.

If you can't read the dials on your dashboard, you need to be a passenger. If you don't want to work with your business numbers, you should get a job!

Greg Mason is CEO and Business & Executive Coach at bizHQ. He writes columns for ITWeb Africa that provide advice for up-and-coming African technology businesses and startups. To find out more about Greg, be sure to visit his website: http://www.coachgregmason.co.za.

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