Entrepreneurs often progresses through four stages of financial management focus – Check book balance monitoring, cash flow monitoring, net income monitoring, and net worth monitoring. Each change brings its own learning curve, and the change of focus brings increasing rewards.
Often a new entrepreneur will gauge their financial health by looking at their check book balance, and very little else. As time goes on and the flaws with this system come to light. A bounced a check or two and the stress of being chronically short of cash pushes your focus to cash flow and timing. First with a week, then a month and eventually working up to focusing on yearly cash flow. Lack of cash flow management will kill a business faster than lack of profitability. Businesses with high debt can easily be profitable but have crippling cash flow issues that shut down a business.
The next step in a company’s progression is to start focusing on managing net income. Cash flow is more important in the short term, but in the long term, you have to make a profit. Cost control measures and sales systems are put in place to insure profits. Plans and processes that put money towards the bottom line.
The last step is one that few entrepreneurs think of – managing net worth. Opportunities that provide the fastest growth to net worth are prioritized and funded. The impacts of debt on growth are understood and exploited. It is a subtle change, but focusing on net worth is what builds lasting wealth.
As a business matures, the monitoring of financial progress must adapt as well. Where are you at on the learning curve?