Building a Business vs. Making a Living

You need to comprehend financial basics to make your venture more than just a revenue stream, says Bill Hettinger. Learn how to read cash-flow statements and gauge your competitive position

By Karen E. Klein

Small business owners who don't understand their financial statements and don't bother to learn how to read them will never make fully informed decisions for their companies, says Bill Hettinger, co-author of a new book, Finance Without Fear. Hettinger, an economic development and entrepreneurship consultant and business professor, and his co-author, John Dolan-Heitlinger, aim to take the mysteries out of basic financial statements and make them more accessible to entrepreneurs. Once small business owners know what the numbers mean, they can plan more knowledgeably and avoid being blindsided, says Hettinger. Edited excerpts of his recent conversation with Smart Answers columnist Karen E. Klein follow.

Karen E. Klein: Your book contends that most business owners either don't understand the financial details of their companies or don't focus on them. How widespread do you think the problem is?

Bill Hettinger: It seems like 75 percent-ish don't focus on their finances at all. Some of them are artistic people and finance is not the skill they are into. But even the folks who have technical backgrounds don't tend to focus on finances. We find that people wait until they have some external reason to do so, like when they need to go to the bank for a loan, or they need a business plan, or there's some sort of shock to the system.

Someone recently told me: "I'm a sales guy. I didn't have to learn finance until I was 45 and opened my own business." A publicist who worked with me said, "I used to have another business and I never really looked at [finances] until I had to sell the business."

What problems result from that kind of hands-off approach?

On the most basic level, I've talked to entrepreneurs who have no idea how much money their companies make. You shouldn't need to ask your accountant that. If you introduce a new product, you will have no way of determining whether you'll make money off of it. Or you may buy a $25,000 piece of new equipment and you don't figure out until later that you'll never make enough money to pay for it.

Entrepreneurs often discover belatedly that cash isn't income or that their business is not profitable. They take money from their companies before they have to pay for supplies or rent, and three months later they discover they don't have any money to pay taxes.

If the company is successful, does the founder really have to be hands-on about the finances?

The problem is, who's making the day-to-day business decisions? It's probably not the accountant you see quarterly or annually, but you or one of your line managers. It's important that you understand the impact those decisions are having on your bottom line.

Why is there resistance to examining the numbers closely?

We asked this same question when we set out to write [the book]. First, people always gravitate to what their skill set is, so they gravitate toward selling or cooking or whatever—not to numbers.

The other answer we came up with is that finance is complicated. It's usually presented in accountant-speak, not really explained in plain English. We move terminology around in finance. Your accountant may be using different terms, like sales and revenue, which mean the same thing. If you're not in on the language, that becomes very confusing.

Do you advise small business owners to take accounting or other finance courses?

Not necessarily, because accounting is very mechanical and it will be focused on stuff that business owners don't really need to know.

The other thing we discovered: If you have ever looked through a finance book or class, they're all based on manufacturing. So you'll learn about raw material purchases and inventory. They don't talk a lot about service businesses or retail businesses, even though manufacturing only accounts for a third of our economy today.