by Brad Hoffer, www.xlyourfinances.com
As an entrepreneur you know every decision has a risk-reward analysis. Some of these decisions are simple and can be made within seconds while others are very complex and require much more analysis. As the owner, you have the weight of each of these decisions on your shoulders. You make a decision and there are limitless potential outcomes, some good and some bad. When it comes to making good money decisions for your business there are some guardrails you can structure around your business that can keep you on the right path. Guardrails are not guaranteed to keep you on track, but they definitely increase your chances.
The first guardrail is good record-keeping! You don’t know what you don’t know. It is going to be impossible to make good business decisions if you don’t know what is happening financially. Think of Accounting as a reflection of reality. You may feel like you are being successful, but the numbers should prove that out. When you are starting out it is easy to allow your personal and business records to overlap. Keep them separate and stay on top of reconciling your bank accounts to ensure accuracy. Depending on the complexity of your business, you should consider hiring an Accounting firm to assist you with your bookkeeping functions. As part of your record-keeping you should establish your goals for the year in the form of a budget. Each month you should be comparing your results to the budget and if you have more than one year of business you should also be comparing results to the prior year.
The second guardrail is cash flow. You can be making money and still have negative cash flow. The timing of payroll, debt payments, receivables and payables can create a cash crunch that can threaten your business survivability. Cash is king! You must invest the time necessary to evaluate your future cash flows. In addition to the timing of your monthly bills, you will need to consider your business' sales cycles including seasonality. There may be times of the year where sales are high but cash is tight and other times where it is the opposite. When you talk to your bank about your cash needs, the conversation will go a lot better if you have this work done. Your bank can provide you a line of credit to help navigate these fluctuations. Depending on your business the bank will have its own set of metrics that they will expect you to meet to ensure you aren’t getting over-extended. Your banker can be a valuable resource as they are in a unique position to see what works and what doesn’t across many industries and many businesses. They are vested in your success because they have skin in the game.
The third guardrail to consider is profitability. Sometimes I encounter business owners who have an unprofitable business model. They have a good product or service but they are not making money. They may have positive cash flow which allows them to keep operating but it is just a matter of time until it will catch up with them. Sometimes these owners are so busy running the business that they don't take the time to figure out how to turn a profit. They keep hustling for more sales but adding more business to a flawed business model just produces more of the same result. As stated by James C. Collins book "Good to Great" you must "confront the brutal facts". It is amazing the lengths we will go to avoid an uncomfortable conversation. The mantra I try to embrace is "fear no conversation". The truth of a situation will come to light if you stop avoiding it. No one wants to work for a failing business, but at the same time, there are a lot of people who are energized and motivated to turn a business around. The reality is you won’t ever turn around if you don’t know you’re lost. Take the time to honestly evaluate your business. What level of profitability are you satisfied with and what will it take to get there?
The fourth guardrail is leverage. How much debt are you carrying in comparison to your assets and income? If you carry too much debt, you greatly restrict your options. Do not take on too much debt until you have a proven revenue stream. This is difficult because so many times a business concept takes a lot of money to get off the ground. This is why you often see businesses who are successful venture into other areas because they have the security of their core business that enables them to attempt to do something new.
The fifth and final guardrail is to establish integrity as a core value. I have been fortunate in my career to not only work for businesses that had a strong business model but more importantly had the right values. You need to establish early on what kind of business you want to operate. Will it be one of integrity that your employees can be proud of or will it be one of poor rapport? Establish your core values, hang them on the wall and teach your employees to embrace them. It has amazed me the number of times decisions that were made because we were “honest” came back to benefit us in the long run. Your reputation and trustworthiness make other businesses and customers want to work with you. This doesn’t always have an immediate impact on your numbers but it definitely benefits you in the long run. Play the long game and choose long-term strength and sustainability over short-term gain. The reality is that those short-term gains that come out of compromised moral values really are losses that just haven’t been recognized yet. In Accounting we call that an accrued liability.
Whether you started, acquired or inherited your business you know the stresses of ownership. Sometimes this stress can lead to poor decision making. Follow these money guardrails to improve your chances of success. The risk-reward analysis will come out in your favor more often than not. Start with good record-keeping, manage your cash flow, analyze your profitability, minimize your leverage and run your business with integrity and you will be well on your way to running a successful business you can be proud of.
I have been an Auditor, Analyst, Accounting Manager, Business Systems Manager, Controller, School Board Vice President, Director of Finance, CFO and Senior VP of Operations over the past 2 decades of work experience. In my free time I developed the XLYourFinances spreadsheet and website I enjoy golf and spending time with my family. We attend church at LCBC.