Think like an Investor!
As I talked about in Part One of the 5 Secrets to Financial Success for Business Owners, your business is an investment, so think like an investor, not an employee. You need to know your numbers backwards and invest in a strong, capable admin and management team that can help you get across your numbers.
Many business owners don’t appreciate the importance of the accounting function in a business do they just employ anyone who says they’re a bookkeeper. It is very easy to enter accounting information correctly but it is just as easy to get it wrong. Pay a bit more to find someone with the skills you need, and who you can trust and then get your accountant to keep this person accountable. If your revenue is greater than $8 – 10 million, you need a qualified management accountant with experience. Do not try and skimp on costs in the administration of your business. If you don’t have the right people and the right controls in place mistakes will happen and possibly even fraud, and it is highly unlikely that you will know about it until it is too late.
Every business should do a realistic 3-way budget for the next twelve months i.e. a profit and loss, balance sheet and cash flow budget. It is amazing how many times business owners say that this can’t be done because their business changes so much. That’s a cop out; every business can do a budget. Develop your budget based on history and what you know now about changes in the business or your industry. However, don’t just budget for a 10% change on last year’s result – in this changing world that never happens.
It is important to regularly (i.e. monthly) report on how the business is performing against the budget. Any significant variances in the budget need to be investigated. A normal rule of thumb is that any variance greater than 10% should be investigated to find the cause of the variance.
Business owners need to fund their businesses, and the only way to do this is either via debt (i.e. the bank) or equity (i.e. the owners). Either way, you have a partner in your business. If you borrow money from the bank then they are a capital partner in your business, so you may as well treat them like a partner.
You need to explain your strategy to your bank and consistently report back on how you are executing your strategy. The information they require is information that any investor (i.e. any business owner) in the business would expect i.e. current, accurate financial information; how the business is performing operationally and is it on track strategically.
If there are significant changes in your business don’t hide from the bank, go and talk to them and explain what has happened. Banks are usually willing to work with clients (in partnership) in even the most difficult circumstances as long as the client is willing to work with the bank. Banks just need to see that there is a plan for the future viability of the business.
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