Talking Dollars and Making Sense: Understanding your financials - The backbone of your business

By Rennie Parris

Welcome back to Talking Dollars & Making Sense. If you’re thinking about starting a business or already have one, understanding your financials is one of the most important things you can do. I consistently tell business owners, “if you don’t know your numbers, you don’t know your business.”

Unfortunately, I know Guyanese entrepreneurs, operating their businesses for decades yet they cannot tell me if their businesses are making a profit or a loss and how much cash their businesses generate from their operations. In this column, we’ll explore why knowing your financials is crucial, using Demerara Distillers Limited (DDL) as an example to help make things clearer.

Why Your Financials Matter

Think of your financials like the dashboard of a car. Just like a speedometer tells you how fast you’re going and the fuel gauge tells you how much gas you have, your financial statements tell you how well your business is doing. They help you see if you’re making money, where you might be losing money, and how you can improve.

The Three Key Financial Statements

There are three main financial statements you need to know about:

Income Statement (Profit & Loss Statement): This shows how much money your business made (revenue) and how much it spent (expenses) over a certain period, like a month or a year. It tells you if your business is making a profit or a loss.
Balance Sheet: This is a snapshot of what your business owns (assets) and what it owes (liabilities) at a specific point in time. It also shows your equity, which is the value of your business after subtracting what you owe from what you own.
Cash Flow Statement: This tracks the money coming in and going out of your business. It helps you understand if you have enough cash to pay your bills and keep your business running smoothly.

Important Numbers to Watch

Once you understand your financial statements, there are some key numbers (or metrics) you should keep an eye on. For example:

Gross Profit Margin: This shows how much money a company keeps from sales after subtracting the cost to obtain products/services. It’s a percentage that helps measure how efficiently a company is producing its goods/services.
Net Profit Margin: This is the percentage of revenue left after all expenses are paid. It tells you how much profit you’re making for every dollar of sales.
Current Ratio: This measures your ability to pay off short-term debts with your short-term assets. A ratio above 1 means you’re in good shape.
Accounts Receivable Turnover: This tells you how quickly you’re collecting money from customers who owe you. The faster, the better!

Demerara Distillers Limited (DDL)

To help you see how these financial statements and metrics work in the real world, let’s look at Demerara Distillers Limited (DDL), the company behind the famous El Dorado rum.

Income Statement: DDL’s income statement shows that a big part of their revenue comes from exporting their products overseas. By watching their profit margins closely, they’ve been able to stay profitable even when times are tough.

Balance Sheet: DDL’s balance sheet shows they have valuable assets, like their production facilities. They also manage their debts carefully, making sure they don’t owe more than they can handle.

Cash Flow Statement: DDL’s cash flow statement shows they consistently bring in more cash than they spend, which is crucial for running and growing the business.

By paying attention to these financials, DDL can make smart decisions about how to price their products, when to invest in new equipment, and where to expand their business.

Why This Matters for You

No matter the size of your business, understanding your financials helps you make better decisions. By regularly checking your income statement, balance sheet, and cash flow statement, you can catch problems early, plan for growth, and keep your business on track.

What’s Next?

This column is just the start of our journey into understanding business financials. In the coming weeks, we’ll take a closer look at each financial statement, talk about how to make financial projections, and discuss why budgeting is so important.

Remember, understanding your financials isn’t just for accountants—it’s for every business owner who wants to succeed. As you continue to build your business, keep these tools in your toolkit. They’ll help guide you to success.

Feel free to reach out to me at [email protected] with your thoughts, questions, and stories. Let’s keep the conversation going and build a strong foundation for your business together. Until next time, keep learning, keep growing, and keep making sense of every dollar.