We’ve all heard them, and it’s true – the statistics for small business failure rates are discouraging. Depending on who’s doing the counting the range is between 75% – 90%. But, it doesn’t have to be that way. There’s a light at the end of the entrepreneurial tunnel, and you have a lot of control over whether it’s a train or not.
Contrary to most peoples’ thinking, external forces are responsible for only a small part of business failures. The majority closed because they weren’t able to generate enough operating capital to stay open, they simply ran out of money.
Businesses run out of money because the owner won’t or doesn’t know how to evaluate his financial situation and problems. He’s unprepared to be a fully functional manager. He doesn’t look past the finances of the start-up phase (short term planning) to the requirements of day to day operations (long term planning). There are ways to fix this.
Can you answer these fundamental financial questions?
What are your margins? Where are your profit centers? What’s your break-even? How much is your rework costing you? Which salesman or estimator is generating the most profit, not the most revenue? How far out is your billing? Are your receivables within industry standards?
If you can’t answer these questions with facts (no guessing), then you’re not taking advantage of all the valuable management information your financials can give you. As an owner – the buck literally and figuratively stops here – you’re derelict in one of your most important duties.
The good news is that if you’re the problem, then you’re also the solution. There are only a few real reasons (no excuses) for why businesses collapse. Not learning to read, understand and use your financials as a management tool is one of the biggest. If this oversight is addressed promptly, your business can be stabilized, turned around and positioned for growth.
Most small business owners don’t look at their financials, and if they do they don’t know what they’re looking at. They certainly don’t use them to manage. Here’s the bottom line on the bottom line – 1. You can’t expect to be successful if you don’t understand how to make a profit and 2. You have to manage your cash flow.
Every accountant, business consultant, and banker has heard an owner say as he’s trying to make payroll, “I don’t understand how this happened. How did I get here?” If he used his financials to manage, he’ d have an answer to his question, or more likely not be in the situation in the first place.
He’d understand that profit is the difference between the amount earned and the amount spent in producing a product or providing a service. Revenue is the money coming in and isn’t the same as profit. You can have revenue and not make a profit, which means running at a loss.
He’d also know where his cash was and where it was going through a cash flow statement (i.e. working capital, dates and reliability scores for receivables, next day billing tracking, daily expenses, loan and payment due dates). Even the best customer can miss a payment, stop working with you or go out of business – having control of your cash flow can significantly minimize the damage.
If you’re willing to step up, learn some new skills and consistently apply them, the monetary and non-monetary rewards are well worth it. You just might get all the things you went into business for in the first place – flexible time off, a good income, self-sufficiency, a secure future, increased quality of life and a legacy to pass on.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: