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Key to making money? Treat finance without fear.

Brian O'Connell on June 8, 2011 Source: Kauffman Foundation

No business owner that I ever met loves financial statements.

Most would prefer a root canal or getting a seven-week course on texting tips from Anthony Weiner than sit down and look through their financials.

But two leading small business experts are out with a new book that encourages entrepreneurs to learn to love their financial statements. Better yet, to use those statements as a springboard to higher profits.

The authors are William S. Hettinger, Ph.D., and John Dolan-Heitlinger, MBA, and the book is called Finance Without Fear. In it, the authors make a compelling case to healthcare entrepreneurs that the gateway to making more money is through the pages of his or her company’s financials, i.e., the cash flow statement, profit and loss statement, and balance sheet.

The book’s key theme is this: if you understand your financial numbers, then you understand your business. Better yet, if you understand your financial numbers, you take control of your business.

Broken down, that means figuring out where your money comes from and where it’s going.

Fortunately, the authors do a bang-up job of explaining that process in a readily understood manner. In other words, you don’t have to have a master’s degree in finance from Wharton to absorb what Hettinger and Dolan-Heitlinger are trying to say (the bane of most business money management books).

“You may think finance is complicated and intimidating,” explains Hettinger, “but it’s really not that difficult to understand. Not understanding financial statements leaves you open to being blindsided.”

The book’s aim is to reach out to entrepreneurs and simplify the terminology traditionally used to explain business finance in a real-world manner. For example, the authors cite a common problem among startup owners – interviewing potential chief financial officers and other financial managers without a “sufficient” understanding of how money flows through a business. The authors say that lack of knowledge can lead to toxic hires on the financial side of the business, and they discuss how things like expenses, cash flow and profits can be adversely impacted.

The authors also provide a short list of financial issues that any business owner needs to know about, and how their daily decisions impact these key issues (a case study in a medical office is a key component of the book). Here’s a quick snapshot:

  • The level of inventory in the business
  •  The time, effort and cost to acquire customers
  • The time it takes to get paid for its products or services
  • The time it takes to increase or reduce staff
  • How much prime shelf space is given to which products
  • When products are placed on sale and for how long, at what sort of a discount
  • How customers are treated
  • The value of the time and effort and actions the person takes each and every day

 

A particularly helpful section of the book has the authors discussing “ratios” that better help entrepreneurs evaluate the “viability and profitability’ of a given company.  “These ratios not only allow managers to analyze where money comes from and where it goes, but they can also be used to determine the effectiveness of changes that people make in a quantitative manner,” the authors say.

For instance, the quick ratio, or “acid test” is particularly helpful to business owners looking to figure out how cash flows through their shop. According to Hettinger and Dolan-Heitlinger, a quick ratio greater than 1.0 indicates that a business has sufficient cash assets to pay its bills over the coming year. A quick ratio less than 1.0 indicates that a business may be short of cash during the coming year.

All in all, it’s a pretty good tradeoff.

In exchange for reading 316 pages of Finance Without Fear, you’ll get a crash course in Business Finance 101 – and that’s a one-sided trade for any healthcare entrepreneur.

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