Profit is what makes business go around. That’s true isn’t it? Unfortunately the highway of business is littered with wrecks of businesses who were profitable, that still didn’t make it. We all know that nothing can save a business that isn’t profitable. You cannot continue to operate without profit.
Nothing kills a business quicker than a lack of discipline around the financial management within the business.
Let me illustrate my point with two case studies on real businesses.
No Plan, No Profit, No Business.
We all have ideas that we believe can be turned into a business. An idea should be researched thoroughly to ensure that the idea can be commercialised. A retail business commenced trading early 2014. The owners took their good idea, which they felt would work, put a lump sum from a payout into the business and expected it to work. They called in an advisor after just four months of trading, as their funds were running out.
When the advisor first met, he uncovered the following:
- There was no business plan
- There was no financial plan, no marketing plan, no sales forecasts
- Importantly, they had no break-even analysis and no cash flow forecast.
- They had no concept of gross profit, expenses and net profit.
- No idea of the target market.
They had opened a store to service the cottage industry which the area was famous for, without understanding that market themselves or importantly where the market was already obtaining the goods and services they were retailing.
The simple fact behind this business was they had run out of money, just four months after opening. Their rent was higher than their sales and with the additional expenses, they had little hope of gaining the sales traction they needed to overcome their dilemma. With no money, they couldn’t re-order needed stock and ended up with dwindling sales and even a more dwindling bank account.
They closed their shop front in October at the conclusion of their rental lease.
Profit Alone Isn’t Enough
Another business I know, was operating profitably but was feeling the financial noose tighten for another reason. One of their best customers had just placed another large order and it was only then they discovered they hadn’t paid their last four months invoices.
All up, there was an outstanding bill of over $15,000. For a small business this could represent the difference between staying open and closing. He rang for advice.
- He extended credit to larger customers to stimulate his product sales
- He had no terms for the offering of credit, just a very basic “Pay on 30 Days”
- There was no credit application process
- There was no process of following up payment.
- He left the financials to the book-keeper
- He was walking a tightrope
I provided a number of choices and advice on each one. The key outcomes needed at was that the bill would be paid, and a new supply and credit arrangement was put in place.
The business stopped supply until payment was made. This initiated a small payment from the customer, upon which they re-opened supply to the customer. Again they didn’t have the key outcomes put in place and they have again found themselves in the exact same situation.
Peter Drucker made famous the statement, “The purpose of business is to create and keep a customer”. There is no point having a customer who doesn’t pay or who isn’t profitable.
That business was worried about losing that customer for the sales and profit being generated. The problem is, they aren’t being paid. It almost seems ridiculous to me, and the customer was certainly taking advantage of the business.
What would you do?
Managing your finances is critical in business and cash is king. Not the physical cash, just the concept of having enough operating cash to pay your bills and being able to operate your business. It’s a pretty important concept.
Some tips to manage your money
- Get Involved. Don’t leave your money management to your book-keeper and your accountant. You need to understand your financials and understand where you’re going.
- Create sales and expense forecasts. Every business needs a goal ad they help people with their motivation.
- Maintain a Cash Flow Forecast. This is vital to manage the “bumps” associated with payments from your business. While a large bill, like annual insurance, is amortised over 12 months for Profit and Loss reporting, the full payment comes out in the one month and your cash flow must account for those things.
- Do you offer a credit facility? What are the terms? What are the requirements of gaining credit? Do you have a follow up payment process?
- Review your financials on a regular basis and seek independent review to ensure you are covering any contingencies.
Review and understand your current reality. How is your operating cash? Do you have any customers continually outstanding or late in their payments? What can you do to improve your financial management?
Source by Tony Curl