Fear is a powerful emotion. It can force irrational decisions, and make the smartest of business owners look meek and ineffective. One area in which fear cripples CEOs is in the analysis of their own financials.  I don’t think it’s necessarily that business owners lack the intelligence or the sophistication to mentally process their numerics. I think they lack the system and understanding of what’s truly important.

Rod Bristol of Profit Mastery broke down seven key steps to understanding your financials. Here’s a snapshot of the seven steps:

1. Plan properly: Planning can help you define your company’s future and help you establish the key financial goals you need to monitor. It starts with answering these four questions:

● What are you going to do?
● Who are you going to serve?
● What are you going to charge them?
● What level of sales growth will help you generate a profit?

These may sound like overly simplistic questions, but answering them may prove to be trickier than you think.  By answering the questions, you’ll define where you’re headed — and gain consensus among your management team in the process.

2. Monitor your position: Bristol’s Profit Mastery program helps you calculate 14 ratios to evaluate your success.  They reveal how your business is operating in terms of profitability, cash flow, and actual net worth.

Using these ratios, you can not only monitor your own success, you can also compare your performances to competitors in the industry, using RMA benchmarks to evaluate your success.

3. Understand your break-even point: How well do you understand your variable and fixed costs, and what does it actually take to grow (or even shrink) your business?  For every dollar of fixed costs that you add to the business, how many dollars in additional revenue must you generate?

Knowing this break-even point can help you manage your expenses and provide parameters for areas such as marketing. To measure the effectiveness of that ad campaign, how much do you need to generate in revenue to justify the spend?

4. Know your cash flow patterns: Cash flow is the key to business success (and life in general). There are a multitude of cycles that can affect your cash flow — understand them and prepare for them.

5. Know your financial gap: What capital do you need to grow your business? Is there a point where your sales are growing too fast, exceeding your capital base and your ability to keep pace?  You have to understand your capital base.

6. Align financing with asset needs: Knowing your financial gap is the first step. Next, you must understand your asset needs and ensure you are aligned with the proper means of financing their purchase.  That requires crafting the correct loan proposal and dealing with financing institutions properly.

7. Transition effectively: What happens when it’s time to sell the company? The answer to that question might be a long way off, but planning for the inevitable transition now is critical.  For example, three years before the sale of the company, you have to demonstrate how effectively the business delivers cash.

The more cash you stockpile, the more attractive you are to potential investors.  And it will help deliver the business valuation you need to woo buyers.

There’s more details on how to overcome fear of business financials in this post, including an in-depth interview with Rod Bristol. Check it out!