1. Introduction
What if the car you drive daily does not have gauges like gasoline, oil level, speed, revs, mileage or temperature on the dashboard? It is highly likely that your car will suddenly not start, turn off, stop, suffer a serious breakdown, or simply not work anymore. All of the investment you made in that car would be lost, or at best, you would have to pay an auto technician to repair or salvage it. If no one in their right mind would buy and / or drive a car without control indicators, why do most micro and small businesses "drive" without financial control indicators?
We know that only 2 out of 10 micro or small business entrepreneurs have been formally trained to manage their own company, of these 8, the majority are not those who know whether their business is business or not. The vast majority of these entrepreneurs do not have independence between their finances and those of the business, do not know the methods of preparing and controlling financial information, and do not know what are the most useful indicators to know the performance of the business. The result: adrift businesses where the businessman, despite working every day within his company, is uncertain about the economic information that he presents.
2. Independence.
It is very common to come across in practice with the businessman who "assaults" the company every time he personally needs money, takes as much money from him as he thinks he can get out of it, and keeps it running, or worse, makes personal plans with money that has not yet entered, but that is expected to enter the company.
Companies, formal or informal, individuals or companies, have their own identity, are economic entities in themselves that generate their income and expenses, have their assets and their own debts (obligations), require capital or loans and enjoy commercial personality before its clients and suppliers. Furthermore, if the company was established before a Notary Public, it has a personality, not only economic, but independent from its owners, such as having its own name, birthday (date of birth), birth certificate (constitutive act) where they are
Not only that, the owner of a micro or small company, not only has an independent personality, but he even runs up to three roles within his own company. The first is that of "owner or partner", in which he must receive for his capital investment (in kind or in money) an amount of money called dividend or profit, which is generated through the operations of the individual called company. The second role is that of "employee", (in the event that he works within the company) for which he must receive an economic remuneration called salary, which must be similar to what the company would pay to any employee who hired to perform the functions he performs. The third role is that of "lessor",for which you have to receive an amount called rent for the use of movable and immovable property that you own and that the company is using for its operation, this in the case that there are assets that are not considered part of the assets of the company and it is using them for its operations.
The remuneration that the entrepreneur obtains from his business is not commonly calculated based on this principle of independent personality (also called “Identity”), so the incipient calculations of profits that the entrepreneur elaborates or knows are far from being really utilities.
3. The Elaboration of Information.
Experience tells us that the main reason why companies are undercapitalized is not because of economic contingencies, but because of the behavior of their own owners, who due to ignorance about financial management, lead them to lose so much flow that one fine day it cannot be sustained without a new capital injection or loan.
There is such a level of ignorance about financial management that the most common calculations to evaluate the results of micro and small businesses by their owners is the famous "money left over", after paying "to whom it is owed." This is how the expectation is created that to the extent that the company has money, the entrepreneur will become richer.
Given the above, experts place the first major risk of companies on money control, specifically on money movement. The dynamics of inflows and outflows of money and their control is one of the "coconuts" of every businessman. Hence, suddenly and a day before the commitments: "There is no payroll" or "I already bounced a check!".
The surprise in the amounts of money needed or surplus can be controlled and managed with a spreadsheet called "Cash Flow". This sheet, more than any profit calculation, is the easiest tool to carry, the most useful to control the company and the least used in practice by micro and small business entrepreneurs. We experts call it the "flyer" of the company. Commonly called the “Schedule and Budgets” sheet, the “Cash Flow” sheet has columns that represent periods, which are commonly weeks, fortnights, or months (as money movements are presented) and consists of a line called “Balance Initial ”, a section of“ Inputs ”and another of“ Outputs ”, finally a line called“ Final Balance ”.With this tool developed periodically and projected to future periods, it is not necessary to have a “magic ball” to predict the near future, and even better, to make decisions in advance and not fall into breach of vital commitments such as payroll, income or payments. of suppliers, or worse, in a decapitalization of the company such that it prevents it from continuing to operate.
There is also in practice the confusion between the calculation of profits and "profits". Commonly, the calculation of profit is understood as the upper difference between Sales and all Costs and Expenses. Whether it is called Profit or Profit, the complicated thing is not to make a correct subtraction, the interesting thing is to use the correct concepts of Sales, Costs and Expenses in said calculation.
In principle, "Tickets" are regularly confused with Sales, of course they may be, however, what if the Cash Entry was motivated by a Sale made in the past, or in the future? The periods of the Sales are not always the same as those of the Cash Entries, so it is common for the entrepreneur to confuse a time of high Sales with a time of recovery of credits previously granted. The Sale is considered as such, from the financial point of view, at the moment the parties' commitment is created, either via the generation of an invoice, the delivery of the product or service, the signing of a contract or promissory note., or, the payment in cash or check.
Now, if the Sale must be considered within the financial calculations in the period in which it was made, it must also be faced against the Costs and Expenses that contributed to generating it in that same period, based on the same nature of the Sales, to be able to determine with certainty the utility of the period. The periods of Costs and Expenses are not always the same as those of the Cash Outflows. It should be clarified that the most recurrent error in this regard is the omission of the concepts of Administrator Salaries (which is also generally the owner -see independence section-), unpaid income (From assets regularly loaned to the company by its owners, relatives or acquaintances and used in operations),the depreciations of the assets owned by the company (allocation of the value of the assets over the useful life to expenses, for their correct replacement. Concept of which I intend to make a complete article) and the various taxes generated (ISR, VAT, IA, Tax on Payroll, OCT, etc).
It is until after integrating all the previous data, isolated by periods, when there is a real and accurate calculation of the company's profits in that period, a calculation that reflects the company's financial performance and supports assertive decision-making.
4. The Indicators.
If I invite you to partner with me in a business, which business would you prefer ?:
Business "A": Sales of the previous year = $ 1,000,000.00
Business "B": Sales of the previous year = $ 100,000.00
Business "C": Tax Free Earnings from the Previous Year = $ 1,000,000.00
Business "D": Tax Free Earnings from the Previous Year = $ 100,000.00
Do not continue reading if you do not have an answer. 0.
What did you reply Normally you chose business “D”, however, you could also have answered “I lack information”, which means that you have good notions of financial management. If not, and you chose one of the four options, pay close attention.
It is commonly believed that having profits is what is important in a business, yes of course, nobody would expect to create a company and eternally generate losses. However, profit, understood as a superior difference between sales and all costs and expenses, is as relevant to the company as my car's mileage (32,350 km) is to you. Profit really takes on meaning when compared against the investment that helped generate it, this concept is called "return or profitability" and is somewhat similar to what is received by interest when making an investment in the bank or some other financial institution, a percentage rate (%). Already calculating this rate of return, how do you know if it is good or not?
Many people use a parameter that is too simple to give a good or bad value to the rate of return. Some analysts commonly recommend comparing the company's rate of return to the bank's interest rate on a similar investment amount. However, the rate of return of the companies are NOT comparable with the interest rates of the banks. You will guess why. Indeed, if you thought that investing in the bank is much safer than being successful in a new company, you are correct. And not only that, by investing in a bank you can withdraw the cash when you have it, or, at the expiration of the term, in a company you cannot convert the assets and property of the company into cash so easily. Furthermore, it is not the same to go to a financial institution (Bank, Stock Market,Investment Company, etc.) to invest an amount of money, to work hard to establish from its roots and start a company. So?
If we must determine a minimum accepted rate of return (TREMA) for our company (benchmark that would tell us quantitatively, the performance of the company) what would it be? Reflect for a moment. What financial option has a risk, liquidity and a creation difficulty more similar to a micro or small company? I don't know about you, but for many analysts specializing in micro and small business projects, the TREMA should be similar to the interest rate charged by various small loan financial institutions. Think about it like this, what is the risk that these institutions take when lending small amounts of money without guarantees? Stop, don't you think? How easy would it be for these institutions to suddenly recover all the money they have with their clients in cash? Hard,he does not believe? How easy is it to create and manage an institution of this nature? Complicated, don't you think? Thus, and given the previous similarities, a rate (cost of money) similar to them is determined, which is currently approximately 35% per year. Do not panic, we do not take into account the price of money that has a similar, but informal, lender colloquially called "agiotista".
When you carry out this type of analysis periodically in your company, and it presents a higher profitability than that accepted in a sustained way, it is then when you will be able to assert that you are a successful entrepreneur for having one (or several) really profitable company (s) (s).
5. Conclusion.
The lack of knowledge in financial administration (as in many other topics) in entrepreneurs and business owners is a common situation, which is not healthy because it is not common. The identity of the company is mixed with that of the entrepreneur, which generates hidden prejudice against the company, the calculations of those who do find relevance in the financial information, become uncertain and incomplete, and the performance indicators are with frequency limited and not valued for decision making. This situation unfortunately maintains business owners in a business illiteracy since finance is the language of business, useful for communication with all banking, government, consulting, evaluation of investment projects, shareholders, suppliers, and more than anything,for making the right decisions.
As many know, in our country there is a lag at the educational level, so it is not surprising that the profession of being an entrepreneur also has a high level of empiricism. However, the concern is not education itself, but the lack of it causes incompetence to create and manage businesses with sufficient competitiveness to create well-paid and sustained sources of employment, contribute to government spending and cooperate in economic spill from our communities (topics from another article).
A professional is not done with an academic degree. A professional exercises his trade with the highest level of seriousness, commitment and quality. The business professional, also called "Entrepreneur" is a title in itself that many hold and few exercise. When you know and periodically apply financial analysis with real and accurate information in your company, it is then when you can proudly and fairly share the title of "Professional Entrepreneur".
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