Bare Bones Biz
I subscribe to Fortune Small Business Magazine. In a recent issue, columnist Jay Goltz wrote an article called Do the Math. He described a friend’s business this way…
“My friend was running something of a Ponzi scheme, except that he was conning himself instead of clients.”
The article illustrated how you can fool yourself (and your banker!) into thinking you have assets when it’s all just a house of cards. I have seen lots of balance sheets built on faulty accounting. If you are starting to sweat, read on. You can fix your financials and you can turn around a bad financial situation…if you are willing to apply some bare bones business basics.
Bare Bones Biz basics…
In business, there is ultimately one financial Scorecard: The Balance Sheet. Every other financial report is a subset of the Balance Sheet. This is the Balance Sheet equation…
Assets = Liabilities + Equity
Assets = Claims on the Assets. This equation is in line with the universal law…what goes around comes around. Or, for every action there is a reaction. It’s how we keep financial score in the game of business.
Warren Buffet’s Rules for Business…
I love Warren Buffet. The guy makes money the bare bones basic way. He builds companies that make profits. Here are his rules for business…
- Protect the Assets. The assets are your ‘stuff.’ What you have. The first financial objective is to protect the wealth you have.
- Grow the Assets. The second financial objective is to expand the ‘stuff.’ Grow cash and other Assets.
That’s the game! Let’s look at the three ways that you can grow Assets.
- Through Liabilities. You can borrow money. When you buy a new truck, and get a loan for that truck…Assets go up and the Liability (a loan) goes up. Note that there is “good” debt…and “debilitating” debt. It can make sense to grow using debt (buying a truck is a good example), but it gets crazy when you are putting payroll on your credit card.
- Through Owner Investment. You can put your own money into the company. Perhaps when you got started you wrote a check from your personal checking account and opened up your business checking account. Assets go up and Owner’s Investment (an Equity account) goes up. Again, this may be required to get up and running…but the idea of building a business is to create wealth for you. Not to reduce your personal fortune. (Reminds me of the joke, “How do you become a millionaire? Start with $10 million dollars…and open your own business.”)
- Through Profits. Sell stuff for more than it costs and create profits. Assets go up and Net Income goes up. This year’s profits show up in the Equity section of your Balance Sheet. When you lose money – sell stuff for less than it costs you – Equity goes down and Assets go down. That’s the elegant, beautiful, sometimes horrible truth of the Balance Sheet.
Are you winning or losing the game?
Take a look at your Balance Sheet. Go line by line down each account. Do you know what each account represents? Find out. These are your Assets, Liabilities and Equity. It’s your responsibility to KNOW where you stand. If you have been lax about understanding your financials, I suggest that you step up. Verify that the Balance Sheet is current and accurate. I call this getting to KFP…a KNOWN financial position. You may need some help if you don’t understand the Balance Sheet….or if it looks like a slinky-knot mess of numbers and dollars. Have a sit down with your bookkeeper and accountant and go line by line down the Balance Sheet and ask, “What is in this account? Is it right? How can we verify it?
Make sure the Balance Sheet is right. Then, take a look at the numbers. If you have more Liabilities than Assets, you are going backwards. You’ll have a negative Equity balance. You may be able to fix it. The long term fix addresses the reason you got in trouble in the first place. You have got to charge more than it costs. And you have to have enough Sales at the right price to cover all expenses and make a profit. You might be able to borrow more money and you may be tempted to put more of your own money into the company. You might even entice an investor to infuse some cash. However, the only way to create wealth is to generate profits.