Are you missing the point?Are You Missing The Point? 

It has often been said that “profit is pointless and cash flow is King”.  But do you know why?

It is possible for a business to show a profit for a period of time, yet have negative cash flow.  In fact, businesses that have profit (on paper) go under every single day.  Negative cash flow, if sustained for an extended period of time, will eventually cause the company to run out of money and cease operations.  Therefore, knowing the cash flow position is critical to staying afloat and knowing how to unlock more cash flow is imperative to effectively coach a business owner or senior executive.

Are You Chasing The Wrong Target?

You can have the most brilliant product or service but if the business runs out of cash, it won’t matter. Most businesses make the fatal mistake of thinking that they simply need more customers.  If only they had more customers, they would have more sales and more profit…and they would be more successful.

But is this true?

Can businesses simply advertise their way into more sales and better results?  No.  In fact, advertising and discounting often have a negative impact on the bottom line and cash flow.Simply put – the initial instinct most coaches and business owners have is to focus on increasing sales.  Employing this strategy in a business coaching context – chasing customers and sales – is often the worst thing you can do for the business.

The common assumption is that if you are running a business (or involved in business coaching) where the price you charge for your products is greater than what they cost, everything will be okay: you will be profitable and successful.  Profit is good – don’t get me wrong – but it is simply not enough on its own.  To be sustainable, the business must also have a healthy cash flow.

If you are like most coaches and business owners, you never dreamed that the ability to understand how money flows in and out would be incredibly important. You thought: “That’s for the accountant or finance department to worry about. Sure, they may show me a few reports from time to time, but I don’t see the need to really understand what the numbers mean. If there was a problem, they would tell me, wouldn’t they?”

You probably didn’t realise that all those numbers – the financial DNA of the business – can tell you a lot more than you thought.  They can tell you why the business is not growing or is struggling to meet targets. They can reveal why there is less money in the bank account [again] than there was last month.

The financial numbers ARE the story of the business. Numbers don’t lie. They are one of the few objective indicators of how a business is performing and where the problems are.  Ironically, financials are the most overlooked area of business coaching with the majority of practitioners choosing to specialize in leadership, sales or marketing disciplines.  Unfortunately, without a solid understanding of financials, it is impossible to coach effectively and produce predictable results.

Regardless of any justifications you (or your business coaching clients) use to explain why the business is not performing – the economy, the shortage of ‘good’ staff, competition, supply chain issues etc. – the numbers tell the truth and can lead you to the solution. You just need to learn HOW to use them to your advantage.

You need a bit of Financial Foreplay.

Are You Avoiding The Numbers?

When is the last time you took two hours out of your week to analyze the financial statements of a client or your own business?  Can you honestly say that you know exactly where you (or they) are at and WHY?  Do you sometimes wonder what the numbers are trying to tell you?  Are you guilty of wasting money chasing new leads and sales instead of fixing the business and making it more profitable?

Most business coaches and business owners make the mistake of assuming they can improve the business by examining the Profit and Loss and Balance Sheet on a monthly basis.  Unfortunately, these statements only tell part of the story.  In fact, you cannot measure the cash flow position of a business by looking at the bank balance or examining the financial statements at a specific point in time.

This is because most businesses use what’s called ‘accrual’ accounting. Rather than recording ‘money spent’, they record spending as ‘money spent plus money committed to be spent’. So if stock has been purchased on account, accrual accounting includes the value of that purchase from the point it is made – not from the point when the account is paid. Accrual accounting takes into account the amount of money that has been spent plus committed to be spent in the future. The same thing happens in reverse with earnings – it includes money received plus money expected to be received. When a sale is invoiced with 30 days to pay, the value of that invoice is included in accrual earnings even though the money won’t be received for at least another 30 days.

Therefore, when accountants talk of ‘profit’, then, they usually mean ‘accrued profit’ as opposed to what we would call ‘real or cash profit’. Accrued profit is the expected real profit after ‘spending already committed to’, and ‘earnings expected to be received’, are
taken into account along with real (cash) spending and real (cash) earnings. As a result, the profit showing on an Income (or Profit and Loss) statement is a more complicated and less useful representation of the current financial situation of a business.  Net profit cannot be relied upon in isolation to gauge the financial health of a company.

Stated another way, cash flow must be tracked over a period of time and can be measured by the following calculation:

Net profit (year to date)

+/- changes in inventory

+/- changes in accounts receivable

+/- changes in accounts payable and GST and

+/- changes in fixed assets

=  Cash Flow

Changes in these 4 items on the Balance Sheet have a significant impact on the cash flow and viability of a business. That is why getting inventory levels right, optimizing receivables and payables and investing only in assets that generate a return, is critical when coaching a business of any size.  In fact, a coach can often have more tangible impact and influence on a business by focusing on these 4 areas than on directing effort towards gaining new customers and increasing sales.  And oftentimes, it costs the business very little to implement highly effective strategies in these 4 areas.

In practice, it is vital to have an eye on both real profit (cash flow position) as well as accrued profit. It is a common error to focus solely on accrued profit – an error which has the potential to send a business to the wall prematurely.

Are You Sure It’s Profitable?

Profitable growth should be the goal of any business.  However, you cannot achieve profitable growth without first establishing that the business is in fact profitable.  Attracting more leads or closing more sales may not be enough – the costs and efficiencies in a business change every day and this means that we must constantly monitor and measure results and take appropriate action.  Focusing solely on customers and sales is a bit like spending 100% of your time practicing your tennis serve while neglecting to watch the scoreboard, analyze the strategy of competitors and practice your returns.

Break-even is one of the most simple and powerful calculations that you can use yourself and with your clients each month to measure and enhance profitability.  A company is said to “break-even” for a period (usually a month) when its sales revenue catches up to its costs. Specifically, accountants talk about break-even as the point where ‘fixed costs’ (rent, salaries, etc.) are matched by ‘gross profit margin’ (sales revenue minus COGS).

Therefore, it follows that break-even with profit is the point in the month where the business covers all of the fixed and variable costs and starts making the desired profit target.  Remember, if you and your clients are in business and not running a charity, the goal is profitable growth.  In order to achieve profit, you MUST in fact plan to achieve it.

Calculating break-even (and break-even with profit) each month and knowing specifically which day of the month the business breaks-even, allows management to make informed, strategic decisions about how to achieve growth that is profitable for the bottom line and enhances the cash flow position.

Are You Ready To Get Results?

Knowing where the financial pain is when you are coaching a business allows you to focus your time and resources where they will make the greatest impact on the bottom line.  And if you are truly serious about being a successful business coach, and it is not just a hobby or a way to pass the time, you will find a way to fit a bit of Financial Foreplay into your day so that you can help others to whip their businesses into shape and start taking home more cash! It’s the quickest and most effective way to get your clients working ON not just IN their businesses.

97% of business owners (hard working entrepreneurs just like you) ask themselves 1 question without fail every single day.  Do you know what that is?

Do I (or am I going to) have enough cash to pay x?

Unfortunately, that is without a doubt the worst question you could ask yourself.  Knowing exactly where you stand financially (i.e. your cash flow) is critical to your business.  Your survival hinges upon your ability to cover all taxes, payments to suppliers and operating costs as they come due.

So if cash flow is so vital – why is this question so very bad for you and your business?

There are 3 common mistakes that I see business owners making every single day – and they relate to that question you’ve been asking yourself.  I would like to share them with you right now so you can stop making them and start getting on top of your cash flow position.

  1. Stop looking for cash flow in all the wrong places – when you ask yourself the question about cash, the most likely thing that you will do next is look at your bank balance. Unfortunately, your bank account merely shows your cash on hand but it will never tell you what your cash flow is or (more importantly) HOW to improve it. Seeing that you do not have any cash  is NOT enough.  You need to know what your cash flow position is and where specifically cash is trapped in your business.  Once you know where the cash is trapped, it will be a lot easier to take action to unlock it and make it available for use in your business.
  2. Stop relying on a cash position estimate – this second point is related to my first one.  I see so many business owners just like you making this mistake every day.  And it is not entirely your fault because many of your accounting reports may be incorrectly labelled.  Most accounting software packages contain a report that shows your bank balance and lets you project what your cash position might be in the future – for example 30 days from now.  They often incorrectly label this a cash flow projection. Actually what you are really doing by looking at this report is very subjective. It takes your bank balance (which we talked about before) and adds all the sales you might have in the future minus the bills you might pay.  Unfortunately, this involves a lot of speculation about what might or might not happen in the future and it still doesn’t give you a clear picture of what you need to do to unlock cash in your business.  More often than not, this exercise will lead to you focusing more and more of your time and resources on sales – and that activity may actually worsen your cash flow position. Especially if you sell on credit terms or if you sell stock that you need to order in and pay for today.
  3. Waiting for your bookkeeper or accountant to tell you what your cash flow position is – this is probably the worst mistake of all because it means that you might be waiting for weeks or months with little or no money in your account to pay bills or wages.  This is madness.  You need to be able to print your profit and loss and balance sheets today and calculate your cash flow right now.  It’s not that hard to do and the entire process will take you less than 15 minutes.

 

The important thing to remember is that cash and cash flow are not the same thing.  If your company is profitable on paper yet it maintains a negative cash flow for an extended period of time, eventually it will go under. Being able to calculate and monitor your cash flow position regularly is critical to your company’s health and survival.  You can have the most brilliant product or service but if you don’t have positive cash flow, your business will eventually go under.

If you want to learn how to calculate your cash flow quickly and easily, I recommend that you check out Chapter 1 of Financial Foreplay.  It’s been endorsed by the most recognized accounting software brands in the world and it can help you get on top of your numbers and whip your business into shape today.

Imagine you are playing an important game of tennis…

It’s the club final and you are the favourite to win. There is a big crowd watching and as the game progresses, everything seems to be going to plan. You’re playing well and you’re winning points. Victory can’t be far away. There is only one problem: there is no scoreboard, and the umpire is keeping the score to herself. So no one except the umpire knows what’s really going on.

Nevertheless, you plough on and, despite being in the dark about the score, you feel positive that eventually the umpire will declare you the winner. You are so confident that you can’t help but relax just a little. You start enjoying the party like atmosphere.

Then a shock! Out of the blue, the umpire declares that it is match-point … to your opponent! You can’t believe it. You go back to the baseline, determined, and set yourself up for this big point. But to no avail. It’s too late to get your mind back into gear and you hit the return wide. The game is over, the final is lost. If only you’d been able to track the score during the game. At least you would have been able to fight back a little bit earlier.

Every day, hundreds of businesses, big and small, operate as though they are playing a game of scoreboard-less tennis. Every month the owner runs on feelings for most of the month – no more than a guess about how well the business is travelling. A day or two after the month ended, you will look to the ‘umpire’ – your accountant – who will give you the ‘score’ – your figures. And most times, his perceptions will have proven inaccurate and it is far too late to do anything about it. When things changed in the business – when your ‘opponent’ started to get on top – you simply would not have seen it coming.

Your financials are to your business what the main scoreboard is at a sporting contest. Can you honestly say that you know where you are and where you are going?

Do you often look at your reports and wonder what they mean?

Do you waste money and time chasing new customers instead of fixing your business and making it profitable?

If you are ready to get serious about your business… it’s time for a little Financial Foreplay.

It’s time you learned:

· Why cash, more than profit, is the key to success in business;

· How to find and unlock the hidden profit and cash that is trapped in your business;

· How to use the numbers in your financial statements to give you information that is useful for you – not just useful for your accountant. For instance, I’ll show you how to calculate a few simple but important ratios, to understand the results and to monitor them on an ongoing basis;

· How to stop making common business mistakes that are preventing you from being as successful as you deserve to be;

· Why too much inventory can strangle your business;

· How to manage debts owed to you and minimize the risk of default;

· How to charge the right price for your goods and services;

· How to decide whether an investment will be a good use of your company’s money or not;

· How to work out when, during each month, you ‘hit the front’ and start being profitable;

· How to set powerful and meaningful targets that will focus the attention of both yourself and your staff on making good decisions and taking positive actions ALL the time;

· A way to measure and track your financial success in a simple and meaningful way; and

· How to eliminate the unproductive habits that have been holding you back.

You will learn all this through the stories of my clients. Powerful stories about real business owners, just like you, with common financial problems. I’ll show you how these business owners found themselves in trouble, how they worked out what was wrong (with a little help from the financial numbers) and how they took action to turn things around.

What should you say in your business plan?While only 2 pages in length, the executive summary is by far the most  important component of your business plan or proposal. It is designed to  summarize the key elements, capture attention and most importantly, showcase the  financial highlights.

So, if you only have 2 pages to convey a significant amount of information  and summarize the financial upside, how do you decide what to put in and what to  leave out? Which financial features are critical to emphasize?

Depending on the purpose of your document and the intended audience  (investment, sale, partnership, strategic alliance, joint venture etc.), you  will want to tailor your financial disclosure to suit their needs and  expectations. What would they want/need to see in order to make an informed  decision?

At a minimum, you need to clearly state what financial input is required from  them and what they will get in return – i.e. a share, debt instrument, license,  exclusive right etc. Next, highlight the expected net profit and cash flow over  2-3 years. Also, give a clear indication of return on investment (ROI) AND a  realistic, well defined exit strategy.

In an executive summary, it is important to be succinct and focused. It is  not the time to tell your life story, overpromise with unrealistic projections  or overwhelm with too much detail. You will only get one chance to make a good  first impression and capture the attention of the reader. In fact, many  sophisticated investors have told me they rarely read a business plan or  proposal in its entirety. They make their decision on the strength of the  executive summary and their assessment of the owner/manager (in terms of  character, knowledge, skills and tenacity).

Focus on “what’s in it for them”. Show them clearly how they can benefit and  when the result will be crystallized. Give them enough detail to understand the  industry, opportunity and unique solution you provide. And most importantly,  clearly summarize the key financial metrics of profitability, cash flow and  ROI.

In short, make it EASY for them to invest in YOU.

Article Source: http://EzineArticles.com/6107414

What’s the best way to grow your business?

When clients ask how to close more sales and  free up cash in their business, I like to tell the  story of Byron the guns and collectibles dealer. He lives for his business  because it gives him the chance to make a living out of doing what he enjoys  most: collecting.

He was struggling 12 months ago because he was out of cash and unable to buy  new stock. This was a real problem because the strength of his business lay in  constantly having new items to show off. New stock encouraged his customers to  come back often; no new stock meant they would tend to check out his competitors  first.

When I first walked into Byron’s shop, one of the most obvious items was a  beautiful old gun, proudly (and securely) displayed in a glass cabinet. I  couldn’t help but ask how much it was worth. He explained that it he had bought  it for $5,000 dollars, but was looking to sell it for $7,000. Following a hunch  that I had hit on his problem straight away, I asked Byron when he had bought  the gun. He didn’t remember exactly, he said, but thought it was about five  years ago.

I asked Byron how many other, similarly high value items he had in his store.  We went for a walk and in the course of showing me around, he pointed out at  least a dozen items which he had bought for over $5,000 over the last few years.  In each case, he was quick to tell me how much he was intending to sell the item  for, and the margin was always 30 to 40%. But the fact was he hadn’t sold these  items so they were costing him money and, most importantly, causing him to miss  the opportunity of buying new stock.

Byron had spent nearly $100,000 on expensive items over the years. The items  were attractive and valuable, but they weren’t particularly rare, so they  weren’t appreciating in value significantly. In effect, Byron had put $100,000  on the shelf of his office and left it there for all that time. In other words,  while he wasn’t borrowing money from the bank, in effect he was borrowing it  from himself. He had missed the opportunity to invest the money somewhere where  it would give him a solid return, such as in a term deposit or in blue-chip  shares. And he missed the opportunity of using that money to buy smaller, less  expensive items that he knew would sell quickly.  He needed to do something (and fast) if he wanted to close more sales.

Compounding all of this was the fact that the global financial crisis had  caused demand to drop markedly which meant his customers just weren’t coming in  or spending as much as they used to.

By making a few simple adjustments, responding to trends in the industry and  addressing a need that his customers, Byron was able to turn his business around, close more sales  and double his bottom line.

The first thing he did was to free up some cash by actively selling some of  his more expensive and slow moving items. He used online auction sites and his  own network to find buyers, while keeping his marketing costs low. In some cases  he had to sell the items for a little less than he had intended, but the benefit (when he was able to close more sales) was cash in his pocket.

The next thing he did was set up some systems to keep better track of  inventory. He started by recording everything and noting the age of all the  items (i.e. the length of time he had held it in stock). We agreed that in  future, any item that had not sold after 8 months would be reviewed. Byron would  investigate the item’s market value and decide whether or not it was increasing  in value sufficiently to be worth keeping. If not, he would act to move the item  on.

After a few months, Byron was making much smarter purchasing decisions. He  was still enjoying ‘collecting’ for his store, but his focus was different. His  focus was less on attractive, expensive but not-so-rare items, and more on  smaller items he knew he could sell quite quickly. To his pleasant surprise, he  increased cash flow by $100,000 in 3 months and found that by using this  strategy, he was able to do more shopping rather than less, because he had more  cash available to spend.

Lastly, but perhaps most significantly, Byron introduced 2 new complementary  strategies which literally transformed his business. To counteract the soft  demand for firearms and the relatively fixed, low margins, Byron convinced his  customers to purchase 18 months worth of ammunition upfront and he provided  storage (if required) onsite. This allowed him to renegotiate terms and pricing  with his suppliers, plus generate more cash flow in the short term. Since the  margins on bullets was much higher than on the guns themselves, his overall  profitability improved. In addition, Byron incorporated training and  certification into his standard offering and opened up his target range to  paying customers 3 nights a week. This allowed him to create new, highly  lucrative income streams and increase the frequency with which his customers  came into his business.

While Byron’s story on how to close more sales might seem unique and industry specific, there are many ways to take the overarching philosophy of what he did and utilize it to improve  your operating cash position.

How can you identify and start selling silver bullets in your business?  Begin by first examining the big picture…

Identify the items in your inventory that are essentially dead stock – i.e.  haven’t sold in over 8 months. Determine what the total value of the stock is  and devise a plan to convert it quickly into cash using a minimal amount of  advertising.

Focus on the gross profit margin of all of your products and services. Are  some of these more profitable than others? To improve your overall performance,  concentrate on the former, and improve or eliminate the latter. What items or  services could you add which would allow you to service a need, improve your  relationship with your customers and grow your bottom line?

Negotiate better terms and/or prices with your supplier in order to increase  the amount of gross profit you make on each sale. Consider which items you could  sell in bulk upfront to your customers and use this new volume to improve your  buying leverage or cut out the middle man.

Marketing should not be treated as a fixed and sacred cow in your business.  Do not spend another dime on marketing until you ensure that you are maximizing  the amount you retain on each sale to cover fixed costs. Also, only spend money  chasing customers and sales if you can measure the financial return that you  will get. Unless you are a multinational brand, money spent solely on branding  is wasted.

Make it easy for your customers to find you and see what you have to offer on  the internet. The database of potential shoppers that you have earned the right  to speak to, is in fact your greatest asset. What can you do today to add value, enhance their experience and close more sales?

Finally, examine the fixed expenses in your business. Identify whether or not  there is a cheaper, faster or superior alternative that doesn’t compromise  quality or customer service. Is there a way to shift how and what you do so that  fixed expenses can vary (i.e on a pay per use basis) with the level of  production and/or sales? And remember, no one has ever grown their business by  [exclusively] focusing on cost cutting – so use this tactic as your final step  in a comprehensive plan to get your business firing and hitting targets.  Your primary goal is to close more sales and increase the amount of gross profit (or contribution margin) that you make from each sale.

 


Can’t find what you’re looking for?

Connect with Rhondalynn



Archives

Categories