INTRODUCTION
Why You Need This Book
When I say the words “financial statements,” what goes through your mind? C’mon, be honest. Take a minute and write down your unscreened thoughts. It is okay if four-letter epithets come to mind. No one will see this but you.
Here are some comments written over the years by attendees of my workshop “I Hate Numbers: Accounting for the Numberphobic”:
“Makes me want to get in the fetal position and cry.”
“I’d rather spend a weekend listening to my mother-in-law.”
“I hate numbers and they hate me. It’s mutual.”
“That’s my accountant’s problem.”
“I’m a designer. I can’t be bothered.”
“If I work hard enough, the numbers will take care of themselves.”
“Keeps me up at night.”
“Someone shoot me, please!”
“I love reading my financial statements. I also love getting a flat tire on the highway in the pouring rain at 2 A.M. and getting my wisdom teeth extracted.”
The people who made these comments are very smart, well educated, and talented—just like you. They are designers, IT consultants, photographers, dentists, lawyers, and even pole dancers for fitness. If you’re intimidated by the numbers, you’re in good company. Unfortunately, it happens to be the company of small businesspeople, many of whom are setting their businesses up to struggle and even fail.
Who will benefit from this book? People who run small businesses that sell products or services, accountants who have small business clients, salespeople, marketing people, subcontractors, next-generation small business managers, and entrepreneurs just starting out. Anyone who is thinking of striking out on his or her own, and wants to do it right, and anyone who has already taken the plunge and is struggling to pay the bills. Even the number-savvy—accountants, bookkeepers, receivables and payables clerks—will benefit. Their jobs will become much easier as their clients and customers learn the basics of small business survival.
SMALL BUSINESSES FAIL BECAUSE THEY ARE NOT ADEQUATELY FINANCED? NOT TRUE!
You’ve probably heard the Small Business Administration statistic that roughly half of small businesses launched in the United States never see their fourth year of operation. If you ask the experts in Gucci loafers specializing in the painfully obvious, most tell you these businesses fail because they are not adequately capitalized. They cry, “These businesses need credit lines, loans, venture capital, angel investors, and government subsidies!” I beg to differ. There’s plenty of the green stuff to go around. Just imagine how much in second-home mortgage money gets torched on ill-conceived businesses, useless online products, and just plain old clueless management. Billions of dollars have been thrown down the tubes in the last 20 years.
Every banker, consultant, and accountant I’ve spoken with agrees that most small businesses fail due to management ignorance, not undercapitalization. Start-up funds for most small businesses are not used to purchase equipment and build websites. They are used to pay for the management’s learning curve—if the money doesn’t run out before they break even.
So what exactly are small businesspeople ignorant about? It’s not their product or service. Most people start or run a small business because they have great products and services and are world-class at what they do. But these qualities are not enough to build and manage a profitable enterprise. Without a well-maintained engine to deliver products and services, and without the management skills to maneuver and navigate that vehicle, any business will quickly stall out. This is where the numbers come in.
Many small businesspeople assume that numbers are the province of number experts—accountants. They don’t realize that an accountant’s role is similar to your car mechanic’s. CPAs know all about the metrics and gauges that measure business operations and health. They can provide plenty of helpful information for performing “routine maintenance” on your business and helping you avoid the crosshairs of the IRS. But at the end of the day, your CPA is not going to manage your business any more than your mechanic is going to drive your car. You are the one who needs to know how to read your “financial dashboard” so you can get where you want to go.
Yes, learning to drive is daunting at first. But gas gauges, speedometers, engine lights, maps, and steering wheels are not rocket science—and neither are your financial statements. Learning to read them and use the information they provide to steer your business toward profitability is absolutely within your capabilities. Not only that, but you can master these skills much more quickly and easily than you imagine—as I will prove to you in this book.
No, you probably won’t hear this from your CPA. He or she is happy to keep charging you $250 an hour to handle the “complicated stuff” that terrifies you. You’re only going to hear it from someone like me—someone who learned how important it is to tackle the numbers, and ultimately, how feasible it really is.
I happen to be one of those (formerly) numberphobic small businesspeople who paid dearly for my own learning curve. I started a business at age 23 and almost went bankrupt several times. That is a 10-antacids-a-day-for-10-years way to learn about controlling things like the cost of goods—years of pain I wouldn’t wish on anyone. Preventing that experience is my mission with this book. I’m confident that I can teach you in weeks what took me long, hard years to understand, just as I have taught hundreds of small businesspeople in my courses and seminars. My students constantly tell me, “You reached me!” “Now I know exactly what I need to do.” “I’ve heard dozens of people talk about this stuff. I’ve never understood it until now.” Many have come to me with tears in their eyes because, armed with the knowledge I share in this book, they knew their days of hopeless struggle were behind them. Hundreds of businesses that were ready to close their doors are now profitable and growing as a result of what’s captured between these few pages.
HOW TO THINK ABOUT THIS BOOK
Have you ever watched the classic movie The Wizard of Oz? Do you remember the scene when Dorothy, the Scarecrow, the Lion, and the Tin Man were shivering in their shoes in front of the Great and Powerful Wizard? Flames were rising, his voice was booming, and the great hall rang out with his fierce and foreboding presence. Then, to Dorothy’s horror, her little dog Toto ran over to the curtain behind the Wizard, grabbed a corner, and pulled it aside to reveal a powerless little man with a white beard from Kansas. The Great and Powerful Oz was cut down to size in an instant.
In the same way, Accounting for the Numberphobic is going to rip away all the smoke and bluster and show what’s really behind the screen when it comes to using your financial statements to make great management decisions. It’s going to nuke your numberphobia for good and leave you talking about business accounting as something “fun” and “easy.” I know it sounds too good to be true. But after you read this book and review the “Key Takeaways” at the end of each chapter, which offer you the opportunity to apply concepts immediately and effectively, you’ll see that managing a small business can be as easy as playing a video game—because you finally know how to keep score. This book efficiently lays out a tried-and-true roadmap for building a profitable business. This is my goal; I want to show you the simplest way to get there with a book that is comprehensive without being textbook-long or textbook-boring.
You may have taken accounting courses but this is not like any accounting book you’ve ever read. There’s not one syllable with “debit,” “credit,” or GAAP lingo camouflaged on these pages. There are plenty of CPAs out there who have written the equivalent of nontoxic sleeping aids, so this book is easy to follow and fun to read.
Step by step, story by story, I make the hard things easy to understand and to implement. All roads are far easier to travel if they’ve already been paved.
Accounting for the Numberphobic begins by unpacking your three most important navigational tools line by line: the Net Income Statement (or Profit and Loss Statement), the Cash Flow Statement, and the Balance Sheet. Crucial to the very survival of your small business is understanding what these financial statements are telling you about the state of your business. Chapters 1 through 3 review the Net Income Statement, what it measures, how it works, and how you can improve profitability by making small changes. Chapter 4 takes you through a breakeven analysis, which is important to know if you’re building a viable business. Chapters 5 and 6 contain in-the-trenches advice about reading your Cash Flow Statement and managing the collections process to avoid bankruptcy, something many business managers learn after it’s too late.
Chapters 7 and 8 then focus on the Balance Sheet, how it works, and its importance in measuring the health of any small business. They’ll make you an insider by showing you how bankers scrutinize the information on this statement and how you can use this insight to your advantage. Chapter 9 reveals how the Net Income Statement, Cash Flow Statement, and Balance Sheet interrelate as the business conducts day-to-day transactions. Eventually, these statements will become so second-nature to you that you’ll be able to anticipate improvements or see risks before they happen. Chapter 10 reviews the key takeaways from the entire book through a once-in-a-lifetime interview with successful serial entrepreneur Norman Brodsky.
I want you to gain knowledge and wisdom. Knowledge is being able to look at a thermometer, for example, and see that it’s 95 degrees outside. However, knowledge only benefits you when combined with wisdom. Wisdom tells you to wear shorts and flip-flops when you go out in 95-degree weather, instead of your snowsuit. Unfortunately, most training in business accounting focuses on knowledge rather than wisdom. I’ve met business owners who received an A in their undergraduate accounting courses and could define every last item on their financials, yet had no idea that if their gross margin fell below 30 percent, their business would be on the fast track to bankruptcy.
Financial statements measure events that have already happened and establish where you are right now. The great challenge as a small business manager is to gain the wisdom to use these data to identify opportunities, manage risks as they happen, and predict what will happen to the business in the future if you make certain decisions today.
WHY SHOULD YOU LISTEN TO DAWN FOTOPULOS?
I have spent over 20 years in business as a Wall Street trader; I worked as a Vice President in the Consumer Bank at Citigroup, where I ran the Marketing Group for Corporate Card Products, the fastest growing and most profitable product line in the institution at that time; and I was a serial entrepreneur for many, many years. I have also successfully launched more than 80 businesses and product lines across a spectrum of industries including financial services, consumer products, real-estate development, high technology, and nonprofits.
I’m currently an Associate Professor of Business at The King’s College in Manhattan, where I teach principles of management, business strategy, and introduction to marketing, and have been a visiting speaker at Columbia Business School, an adjunct professor at the Stern School of Business at New York University, and a certified facilitator for the Kauffman FastTrac® programs for entrepreneurs.
In addition, I’m a CEO Leader of the national organization Job Creator’s Alliance, started by Home Depot founder Bernie Marcus. My role is to conduct monthly media appearances to advocate for policies that support new business formation and job creation.
I am the founder of Best Small Biz Help.com, my award-winning blog and resource site, whose mission is to ensure that small businesspeople increase profits with limited resources in any economy. The “Panic Button” helpdesk on the site provides live research on what the pressures are that face our target audience: small businesspeople.
My extensive experience diagnosing sick companies across every major industry in the market has been invaluable to both students and small businesses. There’s no faking a deep understanding of how complex and challenging it is to run a successful small business.
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Don’t be misled by the title of this book: Accounting for the Numberphobic is not just about the numbers, accounting, or financial statements. It’s about the future of your business. It’s about equipping you to get adequately compensated for your talent so you can support your family and household. It’s about leveraging your skills, gifts, and experience to have something tangible to show for all your hard work and sleepless nights. It’s about giving you a roadmap so your small business does not become a statistic like 50 percent of your peers. It’s about giving people who run small businesses—whether from an office or a storefront, from the basement, garage, or dining room table—the freedom to dream again and for that dream to become a reality no matter what the rollercoaster economy is doing.
This book is on a mission: to teach you how to keep score by reading your basic financials and understanding what they are telling you to do. Then running a small business can actually become fun and not terrifying. You will be able to anticipate the future instead of becoming a victim of it. When the bills come in, you’ll have the cash to pay them. Most important, you’ll have a business strategy for achieving business success.
WHAT YOU’LL LEARN
• Your financial dashboard is the key to keeping track; it is key to measuring your progress. Learn how to use it to make wise decisions.
• You run the business on gross margin, not on revenues. Work half as hard and increase profits.
• A small business can show a profit and still be going bankrupt. We’ll show you how to avoid this.
• You must collect on outstanding invoices. This book makes it painless.
• Experts who have weathered the storm of small business management give you priceless advice that will set you on the path to profit in any economy.
Whether you are currently in the trenches or have just the barest glimmer of an idea, you will gain immeasurably from these pages.
So you have two choices. You can let the numbers continue to intimidate you, leaving you forever enslaved to expensive advisors, or you can read this book, conquer your fears, and learn how to drive a business down the exhilarating and rewarding road to profitability and positive, predictable cash flow. Whether you’re a small business dreamer, owner, manager, or supplier, you need to know what’s between these pages. While other companies struggle, yours can rise above the fray and flourish. That’s my prayer for you. So let’s get started by learning how to track profits through the Net Income Statement.