Years ago I overheard one of my clients talking to an aspiring employee. The person was a visitor to their office where there was a really stylish white leather couch and the visitor said “How do I get to work here so I can sit on this couch every day?”
And my client replied “I’d love to have you work here. How much would you need to be paid, or would access to the white couch be payment enough?”
He said: “Oh, I’d expect to be paid”
And she replied: “Well that’s easy, work out what you could do here and then work out how you can generate enough profit from what ever that is sufficient to pay your own salary…. and you can have a job. Tomorrow if you want!”
Needless to say, he’s still working on it!
Every cent spent in your business needs to come form some where ….
In the past 15 years I have worked with a lot of business owners and managers. Some are in their very early days and some have a lot of business experience. What I find is that many simply do not know nor understand the true financial position of their business. You might be surprised that in my experience this has been as true for small businesses and larger corporations (I worked for a very large corporation that for most of the time had very little idea whether they were making money or not, there was always the government to help them out).
Some are just not committed to accurate, timely financial reporting. What I am talking about here is no Profit & Loss for months! In fact I have heard bookkeepers and accountants tell their clients that quarterly, to meet government compliance requirements is sufficient.
Many other business owners and managers clearly do not understand the numbers put in front of them. And in many cases it is not their fault, they have never had any training or coaching in how to interpret the financial reports. They turn up to a meeting with their Bookkeeper or accountant who races through the numbers on the reports and then says “OK?”
Often the business owner or StartUp is too embarrassed to ask questions and to show their lack of understanding.
For some people understanding the difference between ‘Revenue‘ and ‘Gross Profit‘ is new to them. For some businesses Revenue and Gross profit might be the same thing; mostly service businesses. Where the business sells a product: Revenue is the amount of money paid by the client, not including GST charged. Gross Profit is total revenue less the costs involved in making or purchasing the product.
There are others in business who might access to lots of information and reports and data and they focus entirely on the wrong data if they do look at it at all.
Over the years I have worked with hundreds of people to help them understand the financial business basics, to explain some of the fundamental concepts. This is exciting. To take Business StartUps and new Business Owners from not really understanding the numbers to building financial literacy …. This is my purpose.
During my time in the Corporate world I knew people who rose to management roles with little or no financial training, they were able to “wing it” or “bluff” at meetings.
Here’s the thing, that might work in a Corporate – for a while.
It does not work in your own business.
You absolutely need to understand your numbers. It’s more than the basics, it’s important to know what things cost, how much money you make on each product and service. Being in business is about generating revenue. Making money allows you to expand, to employ people, to make a bigger impact in your profession or field of business. It also enables you to be generous to your customers and clients, to invest in new equipment and training and to develop new products.
I had a client who came to me because she was running out of money. The reason she was running out of money was because the cost of making her products was more than the amount she was charging for the product. There is only so long that a business can survive with more going out than coming in.
If you are losing money on a transaction, greater volumes of that transaction just mean you will lose more money, more quickly. I have seen this with a few new clients. There is only so long that a business can survive like this, only so long one can “dip into savings” or reach out to “the 3 Fs” Friends, Family and Fools!
Profit might not be profitable
The Profit & Loss may very well look healthy. Taking a good hard look at the Balance Sheet is where the truth is. In Australia where businesses can opt to operate as a Sole Trader, there is no compulsion to create a Balance Sheet as it is not required for the annual Tax Return.
It is the wise Sole Trader who tracks their Balance Sheet with the same enthusiasm as the P&L. It is the Balance Sheet that reveals things like empty bank account, large amounts in outstanding debtors and scary amounts owed to creditors.
Cash Flow is called “Flow” because it is about Money Flowing!
Money Flows In and Money Flows Out! More In than Out!
Revenue s great on the Profit & Loss so long as the actual cash, the payment follows closely behind.
I see so many businesses that do not have a system for tracking their outstanding invoices or if they do have a system and understand how much is outstanding, they don’t have the time, don’t make the time or don’t like to make follow up calls to “get the money in the bank”
A sale is only a sale when the money changes hands! Up to that point it is a promise!
Cash is the oxygen of your business (I didn’t make this line up) If there isn’t enough cash then the business cannot continue, cannot survive.
There are lots of people who will tell you that debt is good and that using other people’s money is smart and that cash in the bank is “lazy money”. I happen to believe there is a balance to be held between debt and cash. Why would you not put a $1000 computer on your credit card so that you can get going with your business and start earning money and providing service to clients.
BTW: Helen Duck from DragonFly Foods has a very interesting approach to not using debt. Listen to our discussion here.
Revenue is vanity. Profit is sanity. Cash is reality.
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I’m Ingrid Thompson and thank you for reading this post.
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