11 financial fundamentals every small business CEO must know
Regardless of the size of the business, ultimate responsibility for success lies with the CEO. If you’re a small business owner, that’s you. And the most critical CEO tasks that result in success or failure lie in the knowledge and practice of financial management fundamentals.
Statistics show that over half of small businesses fail within the first four years. Clearly that mortality could be significantly reduced if, before a business opened, the founder/CEO was required to pass a course that teaches business financial fundamentals and how to operate a business with them.
If you could use a little help in this area, allow me to identify some of the key elements that would be part of the curriculum of such a course.
• CEOs shouldn’t do their own accounting, but successful ones learn how to manage with regular (at least quarterly) financial statements (balance sheet and profit-and-loss) that an internal and/or external accountant produced.
• Successful CEOs know what their gross profit margin needs to be and what it is.
• Smart CEOs track monthly sales-to-expense ratios in order to know when to adjust spending.
• Savvy CEOs monitor inventory levels against projected sales, receivables and cash.
• Real CEOs know how to calculate Accounts Receivable days and Accounts Payable days, understand the relationship between the two, and the impact of that relationship on cash.
• Disciplined CEOs develop a capitalization strategy that blends retained earnings with short and long-term capital sources, like bank debt.
• Capable CEOs identify the critical financial indicators and ratios that are revealed on the balance sheet and its relationship with the profit-and-loss statement.
• Surviving CEOs believe and prepare for the cruel irony of how sales growth becomes dangerous when not properly funded, indeed, that you can succeed yourself out of business.
• When a business isn’t profitable, professional CEOs identify the top impediments to profitability and deal with them quickly, decisively, and without emotion.
• Perennially successful CEOs delegate many things well, but they stay close to the company’s cash picture from tomorrow to the next 12 months.
And finally, arguably the most important financial management CEO discipline:
• Understand and monitor the relationship between Blasingame’s Three Clocks of Small Business: The Expense Clock, the Sales Clock and the Cash Clock.
If you already own a small business and cold sweat is popping out on your forehead right now that should motivate you to kick your financial education into high gear and become an expert on these fundamentals. If you haven’t started your business yet, don’t until you can pass this course.
Write this on a rock ... The ultimate responsibility for your business’s financial performance belongs to the CEO — that’s you.
Jim Blasingame is the author of the award-winning book The Age of the Customer: Prepare for the Moment of Relevance.