KNOW YOUR NUMBERS "So, Gary, what is your liquidity ratio looking like these days?" I put on my best "I'm a sophisticated business guy and I understand everything you are saying" face and then proceeded to make an utter fool of myself. Well, let's come back to that later. I don't like to relive that moment any more often than I have to. Many small business owners make the mistake of shying away from dealing with the financial reports because that is "work for the accountants". The only accounting class they took was in the tenth grade and the only thing they remember is that debits aren't credits and what was the difference again? Times have changed. New software has made it much easier to do your own taxes or keep your own books. Doing it yourself has never been easier. Sort of. Kinda. In a way. OK, I had help. I enlisted my buddy Don who had years of practical hands-on experience as a business manager and financial wizard. He was self-taught but had proven himself over the years so I turned to him and said, "I want to do my own P&L. How can I do that?" Don introduced me to Quickbooks (Hey, this is sort of like a plug so maybe I can get paid for this….or not). Anyway, QB is a good program and there are others as well such as Peachtree, Great Plains or MS Money. After a few in-person training sessions with Don I was ready to solo. It was good for me. I started thinking about every check I wrote as being a line item on my Profit and Loss statement. I learned the rules about capitalizing equipment and how I could write some of it off under IRS Section A Depreciation (notice how I throw some technical terms in to make it sound like I'm really a finance wizard!) Most importantly, though, I learned how every action I was taking was shaping my balance sheet and how that would affect my ability to get bank loans in the future. SmallBiz Rule #3: Do your numbers before they do you! I know. It seems so obvious, but my experience has been that more than half the small business owners today do not do their own books or truly understand their financials. I have purchased several businesses where the owner only had books done because they were trying to sell. Most have their accountant prepare a year end tax return based on a summary of sales numbers and checks written. That works fine if you never have cash flow problems or always make monster profits but my understanding is that condition only exists in a place called Fat City and I don't know where that is. Oh sure, I visited once and, at one point, I thought that I might vacation there but I don't live there and I'm not sure if or when I'll ever find it again. OK, let's go back to my embarrassing moment with the banker. As we rejoin our show in progress, Gary is squirming in his chair trying to respond to the question about his liquidity ratio. After thinking it out carefully, I remember saying something to the affect that I had cut down on my drinking and it wasn't a real problem any more. When my banker explained that liquidity ratio was the ratio of total cash and marketable securities on hand to current liabilities, I recovered gracefully with "Of course, I was just kidding" which (of course) fooled no one. Back then, a short trip to the library would have provided me with all the information I needed about financial terms but I was "too busy" and never did that. Now days, you can get all you need via a few clicks on the internet so if you don't know what EBITDA is or what DSO's mean to your cash flow, take a few moments and educate yourself. Then take a few days and have someone you know teach you how to use software to do your own books. You won't regret it. Doing your own books and knowing your numbers will make you a more effective and confident business owner. Do them before they do you.