People go into business because they are technical experts in their field of expertise and they are sick of making money for other people and believe they can do it better i.e. they have entrepreneurial drive. Business owners aren’t normal. If we were normal we would be working for someone else for a wage without the hard work, stress and heartache associated with owning a business.
However, very few business owners have a qualification in business and I have found that many are overwhelmed by the finances of their business.
I constantly hear from business owners that ‘I am just a … (concreter, plumber, truck driver, travel agent, etc.) … and I don’t understand numbers.’ The accounting profession has made an art out of complicating a process that in essence is very simple. So over the next five weeks I am going to share my secrets to financial success for business owners.
First Secret: Get Back to Basics
Firstly, you need to remember that your business is not a hobby, it is an investment and you need to make money from that investment. Plenty of people have tried to make a business out of their hobby but very few have succeeded because they haven’t been able to get a return on their investment i.e. make money!!.
Every business decision you make in your business has a financial impact. Whether it is negotiating price with a customer, hiring or firing staff, taking on a new supplier, negotiating a lease, employing your mother – every decision has a financial impact and you need to truly understand the impact of that decision.
To be able to do this you need to be getting the correct financial information frequently i.e. at least monthly, if not weekly. Don’t wait until the end of financial year when your accountant does your tax return. You need to understand the true costs of doing business and you need to understand them intricately. Successful business owners know what it costs to operate their business and they watch them like a hawk.
They also know what it costs to open the doors and the cost and profit of selling each individual product in their business. If you don’t know this information then you are operating on ‘gut feel’ which is invariably wrong.
Find a good accountant and good staff and invest some money into getting the information you need to run your business. Get your accountant to explain it to you so you understand how the business is performing financially. Don’t think you’re asking stupid questions. Most people struggle with finance and accounting (it is boring to most people) so keep on asking questions until you understand.
Most business owners are not getting the correct financial information. You cannot hide from the financial performance of your business, you can put your head in the sand for a while but at some point you will have to confront it.
Also, don’t just focus on the profit of the business. You have not made a cent until the money is in your bank account, so you need to focus on the cash generated from the business and you need to understand the cash cycle of your business i.e. How long does it take to convert your sale into cash and what is the gap between when you have to pay your suppliers (including staff) and when your customers pay you?
Ultimately, you need to align your financial strategy with your business strategy. This just means that you need to understand the financial implications of the strategies required to achieve your goals. How much are the strategies going to cost to implement and how much cash will you generate when you achieve your goals?
The good news is that the financial performance of your business is the result of getting everything else right in your business – i.e. strategy, culture, people, systems, marketing etc.
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