Show Me The Money
Running any enterprise is inherently risky, and successful business owners must possess, or have access to, the skills that can navigate through many varied challenges. They need to respond in a timely and measured way to ensure these issues don’t result in business decline or failure. And by mitigating these internal and external risks while delivering products or services that meet customer expectations, they can ensure their company is fit for its purpose.
Business health, just like our own health, is a summation of the external environment and what is happening within the organisation. Many individuals balance their wellbeing by monitoring their weight, mind, and feelings, and business owners need to stay equally vigilant about performance. Key Performance Indicators (KPIs) track business health across multiple areas of any business while observing how external factors are impacting results.
Business owners often focus on sales and profit, which are only two parts of the financial health triangle, with the third and most important being cash flow. While there are small businesses across many industries performing well, growing profits and cash, the Small Business Administration estimates that 1 in 5 small businesses fail in the first year, 1 in 2 go belly up after five years, and only 1 in 3 make it to 10 years or longer.
How to avoid being a statistic
Running out of money is a considerable risk for any small enterprise. And while business owners are clear on day to day operational expenses, their understanding of the revenue generated is often unclear. This disconnect can be catastrophic, but understanding the relationships between the three corners of the Financial Health Triangle of Sales, Profit, and Cash, increases the chance of business success.
And there is an old adage that can help you.
But what does that really mean
Sales are the lifeblood of any business, and there is no better feeling when you win a contract, deliver a service, or sell a product. But it is crucial to manage turnover effectively at all stages of your business.
In the beginning, ask yourself these types of questions:
- What is it you are selling? And how do you set the correct prices?
- Who and where are your customers? And why will they buy from you?
- How are you going to advertise, market, or contact them?
You will then move to the next stage of business development, which poses questions such as:
- How can you grow sales?
- Do you sell more to existing clients?
- How do you find new customers?
- Do you diversify into other products or services?
- How rapidly can you grow? Or should it be more measured?
The questions are almost endless, showing that sales can become the key focus for successful business performance. And why it is the measure of success in many industries. But, it is easy to get caught up chasing sales for sales’ sake. Winning a big contract or building a significant pipeline is pointless if they are unprofitable.
It is easy to see why SALES ARE VANITY.
All business owners do what they do to earn money, and if there is money left over after paying the bills, then happy days. That will certainly keep you clear-headed and rational when making decisions about how you develop your business. PROFIT IS SANITY certainly rings true, so you must always focus on generating profitable sales.
Make sure you, and anyone else who needs to, know your operating costs and the margin you make on every sale. In addition to the product or service costs, include additional variable expenses, such as delivery, equipment hire, or utilities, and make enough profit to cover your fixed overheads.
If you manage and challenge your overheads, you can hold healthy profit margins and make sure you know the breakeven sales every week. Having your overheads covered by Tuesday each week is a great motivator to grow profitable sales.
Eutopia is all your profit sitting in the bank account on a Friday. Unfortunately, this is rarely the case as expenses paid out relate to income not yet received from your customers or clients. Your management accounts look healthy, but your cashflow is under pressure, so things don't feel rosy. This is the difference between PROFIT and CASHFLOW.
The reality is that positive cashflow unpins a healthy, successful, and sustainable business. One that customers trust and remain loyal to, that gains a reputation for paying suppliers on time, and whose integrity creates funding opportunities.
Monitoring your future cashflow with military precision is crucial. Banks are more receptive to timely, proactive requests for help from a well-managed business, so make sure you have sufficient funding in place, and if not, time to agree on financial support.
Payment and trading terms should be agreed upon that work well for both parties. Set relevant limits, complete credit checks, and follow up if obligations are not delivered. Cash is no good if it is sitting in the clients' bank account on 30-day terms when you have agreed to pay suppliers in 14 days.
Stock levels can drain your cash quickly and require proactive management. There is no point holding three months' stock on hand if you can get fortnightly deliveries and make sure you turn redundant items into cash as soon as you can.
In summary, when you review the financial success of your business, take a leaf out of Rod Tidwell’s book, and ask yourself (and probably your accountant) to ‘SHOW ME THE MONEY!”
Have a brilliant week!
Founder & CEO, Fuelled Fit and Fired Up Ltd