Suncourt Hotel & Conference Centre – Taupo, 14 Northcroft Street, Taupō 3330, New Zealand
I often get this question: “What is the most common mistake business owners make when they are growing their business?”
While I could say it is not setting goals, planning their time or doing enough sales and marketing, the true factor must be the lack of financial understanding.
Businesses go bust because they run out of money. Even the most badly run business will survive if it has a constant supply of cash. I have come across businesses run by people who have never taken a penny out of it for themselves – relying instead on investments, family or, worse still – borrowings to fund their personal life. The worrying thing is that they have no idea of their financial status so they continue doing the same old thing.
Even good businesses that make profits can fall prey to Cashflow problems when they start to over trade. Overtrading is where the sales of a company are increasing but the money from the sales comes in slower than the money goes out to pay the suppliers. When the money runs out the business cannot continue even though it has plenty of sales.
Not all factors are a result of the business itself. We are currently in a time when our customers are finding it tough and if they are unable to continue they may well leave us with an unpaid (bad) debt that can have a serious impact on our own business.
The final factor is that the business model does not actually work. The overheads are too high, the profit margin on each product / service is not enough, the systems are inefficient and teams are underperforming.
So how can we reduce the risk of our business failing because of these factors? Well the simple truth is that we need to know our numbers!
Take the sporting analogy – any sport will do – let’s take golf as a simple example. If you do not know how to score how can you play the game? If you think it is a race, then you would be timing yourself, if you thought it was 2 points for a drive on the fairway and 10 for knocking it in the hole then you would not be able to compare yourself to everybody else who might be scoring it differently.
Also can you imagine how dull a sport would be if you did not keep score? How would you know if you were improving or identify your weaknesses or compare yourself to the competition, or even know if you had actually won anything?
Keith Cunningham, the author of “Keys to the Vault,” says: “If you do not understand your financials, you should not be in the game of business.” I am not saying you need to be a financial wizard, but you must know the basics and be able to ask the important questions that will affect the course of your business.
If you have a real problem with numbers then employ someone you can trust to help you. Not understanding the rules is no excuse when you are playing the game.
There are 6 key items you need to understand and look at on a regular basis – at least monthly. (For some businesses, this could be more often such as weekly or even daily.)
1. Profit & Loss account – Key to monitoring your sales, costs, and profit margins for the period.
2. Balance Sheet – A snap shot of the business showing where the money invested in the business is at any point in time.
3. Cashflow Forecast – A week-by-week projection of the flow of cash in and out of the business.
4. Aged Debtors & Creditors – How much you are owed and owe and how many days they are outstanding.
5. Budget – Prepared once a year and reviewed monthly, to ensure that costs are kept in check and sales are meeting targets.
6. Key Performance Indicators (KPIs) – KPI’s that are specific to your business are the pulse that tell you how fit you are. They can cover any aspect of the business from the number of leads coming in, the rate of conversion into customers, right through to wastage and down time.
When you first start learning about your financials, it can be hard and confusing, but it is no different than learning a new language. You can put in the effort, read about it, take lessons, exams etc.
Or you can dive right in, speak to people who talk the language, use what you learn daily and pick it up that way. But remember the old adage still applies, “the more you learn the more you earn.”
There should be no embarrassment going to ask for help to understand your financials – after all if you did not know the rules of golf, you would have no problem asking somebody for help learning them.
The only embarrassment is if your business fails because you misread your score.
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Where’s My Cash Gone?