'I Have Been Literally Hiding From My Numbers'

piece of puzzle

Like a lot of business owners, Laura is very good at a lot of things — but intimidated by her financials. It doesn’t have to be that way.

By Steven Wilkinson

Laura is an old friend of mine. She is a superb consultant and facilitator and has an awesome reputation for her work teaching managers and leadership teams how to increase their productivity. In all the years we have known each other, I had never really talked to her about her financial success. I assumed she was doing fine, making a good living and that her business was thriving.

It wasn’t and she wasn’t.

“I have been literally hiding from my numbers,” she admitted to me during a long call recently. “The reports would arrive from our CPA every month. I guess she pulls the numbers from our bank and credit statements. I don’t really know. I would print them out — that made me feel as if I was taking them seriously — stare at them for about five minutes, and then put them in my desk drawer. I am not quite sure what I thought they would do there. Marinate maybe or just evaporate? My eyes would literally glaze over when I saw all these numbers and terms, and my mind would blank.”

I told her I could teach her how to change that as well as explain to her why her brain was turning to cotton wool and blanking when the financial statements landed on her screen. So she came on my course, a two half-day workshop in which I teach entrepreneurs and business owners how to think about financial numbers. Laura broke down in tears at the end of the first day.

“I felt all this shame and frustration come welling up and that familiar panic, but when one of the other students said, ‘No man left behind,’ and you all stopped to pick me up and make sure I was OK with the material, it clicked. I realized that it was OK not to know, that you would wait for me and then the pressure disappeared. I stopped feeling like I was back at school failing at math and feeling stupid. I just relaxed. You took me by the hand, figuratively, and helped me walk back through the material again. And somehow suddenly I could see what I was looking at and it started to make sense. I could see the picture and how things fit together and that is when I stopped feeling overwhelmed and started being curious. You know, that “Oh! now I get it moment,” when you can suddenly see the picture that everyone else could see all along.

I asked Laura what exactly had changed from her perspective?

“I can’t really explain it any better than to say it is the difference between seeing and not seeing. Beforehand the numbers literally meant nothing to me. They were just numbers with words attached to them. OK so now that has changed completely,  especially understanding what ‘shareholder equity’ is—my money in the business!—and how it moves from month to month and over time, a bit like a dance.”

A key part of the program Laura attended was looking at the actual money that an owner has invested in the business (called shareholder equity even in the smallest business or freelance set up) and learning where that is recorded and how to focus on how it evolves. Knowing how much of your savings are really working in the business and understanding how that amount grows (or shrinks) is crucial to taking ownership.

Equity has two meanings in finance: a precise one and a vernacular one. The precise one refers to the entirety of the shareholder funds accumulated on the balance sheet and includes issued capital (i.e. the shares outstanding at par value), share premium (any price paid for new shares issued by the company over and above the par value), retained earnings (accumulated profits and losses from all previous periods), and current profit. Also included may be equity reserves (accounting oddities) and minority Interests in C corps. In S corps you will see all sorts of strange positions relating to owners draw, taxes paid on owners behalf that get booked through equity and muddy the waters.

The vernacular term is used to mean “your share in the venture” and is used both to refer to “the money you put in” (i.e. I have a $100,000 equity in that start-up) and/or the current valuation (“my equity is worth $250,000 in that start-up”). Here “equity” is just another term for “my share of.”

For small business owners, solopreneurs, and other private company proprietors, understanding the shareholder equity part of the balance sheet is crucial because it truly represents the book value of their personal investment in the business and the single most important source of funding for their company. It is also (usually) their single largest asset next to the equity in their home and therefore the driver of their financial net worth and the only asset that they can truly determine the outcome of.

Owners of small businesses—usually LLCs and S Corps—often find their shareholder funds part of the balance sheet is a mess and incomprehensible because CPAs and financial service people use it the same way people use their garages—to dump all the stuff that they don’t what else to do with. Consequently the single most important piece of financial information on the balance sheet to an owner is often useless, making the balance sheet useless as well.

Looking at shareholder equity in a private (or public) company will not tell you what the business is worth. That is measured by intrinsic value which is more of an art than a science and requires a deeper understanding of business finance than most people possess. However—and this is crucial—looking at the rate of change of shareholder equity over time will give you a very good indication of the rate of change in intrinsic value. That is why I have created a meme that is applicable to every business no matter how small even if it is an unincorporated freelance practice, namely calculating your own share price.

The share price is a meme derived from the balance sheet. It is easy to calculate once you have tidied up the accounting, creates an immediately recognizable number (everyone knows what a share price is and what a stock chart looks like) that can be plotted as a chart and which releases the same emotions as looking at the chart of some company stock that you own only more so because it is your company. Watching it move up and down from month to month is addictive and I have yet to come across an entrepreneur who doesn’t want their stock price to go up. That means they have to figure out what makes it move, which means engaging with the financials and understanding the leverage points which is the gateway to financial fluency.

Here’s what Laura says understanding the concept of shareholder equity means to her: “I appreciate the movement and have a much better idea of why it moves the way it does. I can see the connections. I am much more conscious of what I am doing now. I can literally feel how what I do every day and the decisions I make are affecting my equity and balance sheet without actually having to see the numbers in front of me. That’s radical.

“I know that if I concentrate on this then I will start doing the right things, like charging the right price for my services and valuing what we do properly, like getting rid of asshole clients who are taking away from my business instead of supporting it, like not spending money on stuff we don’t need because it was just feeding into my insecurity or whatever. Now I really want to be profitable and see my equity grow—not because I suddenly want to be rich or anything, not that I would mind that—but I want to be the proud owner of a successful healthy business.”

David Duryee, the author of 60 Minute CFO and a Yoda of financial literacy, says that mastering business finance is a journey, not a destination and all of us keep learning new wrinkles every day. As Laura discovered starting from scratch means building a mental model that requires abandoning most of the limiting beliefs that led to mind blanking in the face of business numbers. That isn’t easy but it sure beats the alternative.

A regular contributor to 21 Hats, Steven Wilkinson and his company, Good & Prosper, offer workshops in financial fluency for business owners. The next two half-day sessions will be held Friday and Saturday. 21 Hats readers get a 10-percent discount by using the code 21HATS when booking the course. REGISTER HERE

We would love to hear from you
Ask us anything
Or suggest a topic for a podcast, an interview or a blog post