5 Top Reasons Companies Fail…
| - Don’t Fall Prey to Any of These
|
| Companies fail for lots of reasons, but financial mismanagement generally tops the list. Here are five of my favorite reasons why firms bite the dust – based on many years in the trenches helping companies beat the odds.
1. Revenue – or rather quality of revenue. Many entrepreneurs – if not most – have a sales background, and they do what they do best – sell! I have seen many great sales tracking processes, incentive schemes, CRM systems and rosy projections. What I often don’t see are client gross profitability models, incentive packages that reward profitability and collectability, and concern about concentration of clients. When it comes time to value your company – make sure you have revenue quality. 2. Failure to Measure Gross Profit. Many small companies fail to distinguish between overhead costs and cost of sales. Cost of sales are those costs that are needed to make a sale: cost of product, cost of service delivery, payroll for service fulfillment. Overhead are costs that would be incurred whether you made zero sales or not: rent, admin, office costs. Failing to distinguish these costs properly means you have no idea how you are doing relative to peers, and have no way to control overhead or maximize profitability. 3. Lack of Costing Data. Many companies fail to develop metrics that can tell them the cost to deliver a product or service per unit. When you pin down your cost of service delivery, you can start to find ways to reduce or transfer costs and improve margins. it can be very enlightening when you find that revenue per unit does not come close to covering costs. 4. Poor or No Forecast. Unless you update your plan continually you cannot know where you are going. You have to forecast cash and revenue growth in order to plan for credit needs. Forecasting is essential if you want to convince buyers that you know what you are doing. 5. Forgetting the 80/20 rule. This well-known rule says that 80% of the dollars come from 20% of the transactions. Also 80% of your problems likely arise from 20% of clients. Once a month make a habit of reviewing your client list, your product or service list and your customer service issues list. Can you eliminate some of those bottom feeders, or put them on auto-pilot? It will make life easier and help put more focus on the real drivers of your business.
|
Business Casual – Jewish Detroiters connect through business networking
In this article in the Detroit Jewish News, I talk about the importance of networking as a way to build your business.
by Yaffa Klugerman
At the Jewish Professional Women’s Network meeting last month, the atmosphere was decidedly relaxed. Participants helped themselves to a light lunch while mingling and chatting. Later, they watched a presentation given by Karen Willner, owner of the YogaWeigh, about her business. The ambiance was so comfortable that it was easy to forget the event was actually a meeting of professionals whose careers included interior design, eldercare, real estate and financial planning. They were all Jewish Detroiters gathered there for the same reason: to connect and learn from each other’s businesses.
“This is a great way to refer people,” explained Rebecca Salama, a financial planner at Raine and Salama, who started the group about a year ago. “I’m much more comfortable referring someone with whom I have a rapport. And in the Jewish community, it’s a quicker level of comfort because there’s usually just one degree of separation.”
The group, which currently has about 15 members and meets once a month, began as a way to network with like-minded women in the community who all shared the common bond of being Jewish.
“The ultimate goal is not only to help each other grow our businesses,” noted Salama, “but also to have a sounding board for ideas and opportunities.”
At a time when communication often refers to a click of the mouse or a tap on the phone, many business owners are making new efforts to establish face-to-face connections. While Facebook and LinkedIn certainly play an important role in business networking, career experts agree that the most effective way to connect with other professionals remains the old-fashioned way: in person.
“There’s something to be said for human interaction,” said Salama. “You get a sense of someone’s personality, and word-of-mouth is by far the best way to refer someone.”
That strategy is particularly valuable during difficult economic times. Even with many area businesses struggling, networking has been proven to yield favorable results. Salama noted that she has already been referred to two new clients by group members and has used the services of four members of the group.
A Natural Bond
Nosh & Network, a business networking group run under the auspices of the Jewish Event Network, also is helping many Detroiters make connections and find employment. As with JPWN, the mood is relaxed and casual.
“It’s very low pressure and a very comfortable atmosphere,” said Adam Gottlieb, who runs the group. “We just go around the room and people introduce themselves and talk about their businesses. You just nosh and network and talk.”
Founded several years ago by Alyssa Cohen and Jason Brown, the group meets monthly, with anywhere from one to two dozen attendees. Gottlieb said that as the group’s name suggests, it’s “a bunch of Jews eating bagels and drinking coffee” who are trying to network with businesses. The connections form easily, Gottlieb said, because people already share a common bond.
“In the Jewish community, everybody knows each other,” he explained, “but not everybody knows everybody else.”
Those who are involved in business networking groups in the Detroit Jewish community can attest to their value. Edward Allon, a partner at B2B CFO, a company that provides part-time CFO services, has built much of his business on networking and referrals.
“The Jewish community in Detroit is incredibly interconnected,” he said. “Networking is much more effective with ‘affinity groups,’ such as the Jewish community, because you have a natural bond with those people that go beyond your business interests. You share natural connections with others with whom you have common bonds, such as Israel or local communal affairs.”
Allon has been involved with several Jewish business networking groups, including the Zebulun Society and Jewish B2B Networking. He also establishes connections through the Michigan Israel Business Bridge, which promotes economic and business ties between Israeli and Michigan businesses, as well as Lunch and Learns through groups like Aish HaTorah.
“Networking and building trusted relationships are the lifeblood of my business and most others,” he said. “That is true more now than ever. Most of my clients have been people I knew or people that they knew. When you work as I do helping businesses grow and thrive, referrals and reputation are everything. And networking is an essential part of that process.”
The Role of Jewish Values
Common roots certainly help foster Jewish business networking, but values play an important role as well. Shalom Klein, founder/chairman of the Chicago-based Jewish B2B Networking and publisher of Jewish Business News, also in Chicago, noted that helping people make business connections is based on Jewish teachings.
“As a child, I was taught that the highest form of charity is helping people earn their own livelihood,” he said. “This is a core value in the Jewish community, and I saw an opportunity to bring together people who sit together in synagogue on the High Holidays and Shabbat, but didn’t yet know what their neighbor does for a living and how they can work together. This is the void that we have been working to fill in the community.”
Jewish B2B Networking ran quarterly business networking events in Southfield and West Bloomfield in 2010 and 2011, but is now focusing on regional programming instead. In June, for example, the group is planning “The Business Event,” expected to draw 5,000 attendees from across the Midwest. Klein noted that in the two years since launching the group, 139 people have found employment.
Ike Engelbaum of West Bloomfield, who has been running the Entrepreneurs’ Network of Michigan for 25 years, has seen many success stories as well. One man, he said, joined the group after going through a terrible divorce, losing his job and custody of his children. The man established connections through the group and eventually became president of his own business.
The Entrepreneurs’ Network, which focuses on helping people achieve their professional and personal goals through support and education, has 250 members and meets every other week. Its membership is not limited to Jews, but Engelbaum, who also hosts a radio show, acknowledged that being a Jew helps guide his vision for the group.
“As a concentration camp survivor, I can certainly identify with how important it is to help other people,” he said. “America has been very good to me, and this is my way of giving back. The Jewish aspect of helping each other is a big part of my belief of how to be successful. If you help others achieve their goals, they will in turn help you achieve yours.”
When Should You Hire a CFO? – The New York Times
|
|
| On October 26, The New York Times published an article titled, “When Should a Small Business Hire a Finance Chief?” This piece deals primarily with growing businesses and some of the major issues they confront. I recommend this article as a good summary of the complex range of issues that all small businesses face.The article defines a number of tipping points that confront companies as they grow. But the primary issue was summarized by one business owner, who said: ”I needed to hire someone who could function as my business partner and allow me to step away from the books so I could manage other aspects of my business.”
Among the challenges that organizations face, the Times identified the following:
I would add cash flow and working capital management, as well as human resources and IT management, to the list. And the CFO is critical to exit planning. Can’t Afford or Don’t Need a Full Time CFO? Hire One Part Time As the Times points out, “no matter how small, any company can benefit from having a finance chief to help organize its finances and track its performance.” But a full time CFO usually commands a six figure salary plus benefits. The solution, say the Times, is to hire a part-time CFO. It is sort of like a time-share condo: you get the high quality seasoned finance leader you need for a fraction of the cost of a full time CFO.
Read the article from The New York Times
|
Are Your Employees Stealing From You?
|
- The Chances Are Pretty Good Someone Is
|
| Recently one of my client’s employees picked up a check from a customer and cashed or deposited it (not sure yet). While this type of theft was pretty brazen (and stupid), it does give me an opportunity to remind people of the obvious ways employees steal from them.It is not a nice thing to think about but employee theft is rampant in small to mid-sized businesses. It never ceases to astound people that a trusted employee could steal from you. It angers you and makes you sad, but it is happening every day. Large amounts are being stolen from businesses both small and large.After the Enron debacle, Congress passed “Sarbanes Oxley” to tighten the responsibility of the accountant to detect fraud. Talk to someone in the accounting community about SOX and they will roll their eyes and heave a large sigh. In all levels of the attest function performed by accountants (compilation, review and audit) SOX has had an effect. The result of this increased testing is that more employee theft than ever before is being uncovered. In fact, the AICPA (American Institute of Certified Public Accountants) released a recent study that has some astounding statistics. According to their survey of members, up to 82% of small to mid market businesses have or will experience employee theft. Of the incidences of theft uncovered, the average theft amount equals $125,000!! And believe it or not, most of these thieves are not prosecuted.
Are you a victim? Most of us would immediately say “No, all my employees are completely trustworthy.” But, what about the next employee you hire? What about the employee who has had an unexpected life change (divorce, death, or other experience) that has affected his/her financial stability? What about that employee’s spouse who you might not quite trust? Could that person have undue influence to convince your employee to do something? I recently met a woman who told me that her husband’s long-time partner stole $250,000 from their business, putting it into bankruptcy. It could happen to you.
Employee theft can come in many forms. Look at the following ways employees can steal from you.
How can you stop this?
There are many ways an employee can steal from their employer. There are also many ways an employer can prevent this activity. Being aware is the first step.
|
Internal Controls Can Save Your Business
Internal Control – Segregation of Duties
One of the basic objectives of good fiscal management is internal control. This is key in both the for-profit and not-for-profit world, where the board of directors has a fiduciary responsibly to ensure that the organization is run with proper controls and checks in place.
The proper segregation of duties, though basic, is by far the most potent tool that leadership has to prevent fraud and mistakes, as it ensure that errors or irregularities are prevented or detected on a timely basis by employees in the normal course of business.
Segregation of duties provides two benefits:
- A deliberate fraud is more difficult because it requires collusion of two or more persons; and
- It is much more likely that innocent errors will be found.
At the most basic level, segregation of duties means that no single individual should have control over two or more phases of a transaction or operation. Management should assign responsibilities to ensure a crosscheck of duties.
If a single person can carry out and conceal errors and/or irregularities in the course of performing their day-to-day activities, they have generally been assigned or allowed access to incompatible duties or responsibilities. Some examples of incompatible duties include:
| An Employee who… | Should not… |
| Opens mail and endorses checks | Handle cash receipts |
| Prepares a document | Approve that same document |
| Handles cash receipts | Endorse checks; Maintain petty cash funds; Receive deposit slips or corrections from bank |
| Prepares bank deposits | Receive deposit slips or corrections from bank; Verify cash receipts; Maintain petty cash fund; Perform audit function |
| Distributes payroll checks | Prepare payroll input |
Segregation of duties can be broadly classified it into the four categories:
- Authorization;
- Custody;
- Recordkeeping; and
- Reconciliation.
In an ideal system, different employees would perform each of these four major functions. In other words, no one person should have control of two or more of these responsibilities. The more negotiable an asset, the greater the need for proper segregation of duties. This is especially true when dealing with cash, checks, and inventories.
Authorization
Authorization is the process of reviewing and approving transactions or operations.
Some examples include:
- Verifying cash collections and daily balancing reports;
- Approving purchase requisitions or purchase orders;
- Approving time sheets, payroll certifications, leave requests, and cumulative leave records; and
- Approving change orders, computer system design, or programming changes.
Custody
Custody is the process of having access to, or control over, any physical asset such as cash, checks, equipment, supplies, or materials.
Some examples are:
- Access to any funds through the collection of funds or processing of payments;
- Access to safes, lock boxes, file cabinets, or other places where money, checks or other assets are stored;
- Custodian of a petty cash fund;
- Receiving any goods or services;
- Maintaining inventories; and
- Handling or distributing paychecks, limited purchase checks, or credit cards.
Record Keeping
Recordkeeping is the process of creating and maintaining records of revenues, expenditures, inventories, and personnel transactions. These may be manual records or records maintained in computer systems.
Some examples are:
- Preparing cash receipt back-ups or billings, purchase requisitions, payroll certifications, and leave records;
- Entering charges or posting payments to accounts receivable system; and
- Maintaining inventory records.
Reconciliation
Reconciliation is verifying the processing or recording of transactions to ensure that all transactions are valid, properly authorized and properly recorded on a timely basis. This includes following up on any differences or discrepancies identified.
Some examples are:
- Comparing billing documents to billing summaries;
- Comparing funds collected to accounts receivable postings;
- Comparing collections to deposits;
- Performing surprise counts of funds;
- Comparing payroll certifications to payroll summaries;
- Performing physical inventory counts;
- Comparing inventory changes to amounts purchased and sold; and
- Reconciling departmental records of revenue, expenditures and payroll transactions to management reports
What Can a Part Time CFO Do for You?
A CFO or Chief Financial Officer is the person on your executive team who sole purpose is to increase cash flow, improve profits and help in improving the bottom line. The difference between a CFO and part-time CFO is only the hours. Unfortunately, many companies who have a need for a skilled CFO do not have the funding to actually hire one. Another senior officer on the payroll might just be a bit too much. In these cases, they might bring on a CFO temporarily to get them running in the right direction and teach them how to keep it up.
The main responsibilities that are performed by a part-time CFO include overseeing all of the company’s financial and accounting practices. This can include such jobs as preparing the budgets, preparing timely and accurate financial statements or even being the long-term trusted business advisor for the CEO. It includes developing systems and tools to give the CEO of the company vital information about the finances as well as give recommendations on the operations of the company and strategies. A CFO will also oversee the budget planning and put into motion any strategic plans for managing the company’s costs. Sometimes it requires a specialist to really look at the business functions and make authoritative, educated decisions.
Some of the other duties include taking care of the cash flow of the company, and making predictions on where those profits will go, or where they will need to go. They must also optimize and maintain good relations with any banks they do business with. The part-time Executive will also take on the responsibility of mentoring your designated staff so that the procedure setup by them will be carried out properly; allowing the CFO to leave the business in your hands.
Many companies are taking the option of hiring part-time to help solve their money woes. Very often, this simple measure can turn a company’s financial standing right around and set them on a far more profitable path. The cost that the company will pay for a part time CFO will be significantly lower than hiring a full-time financial professional that they would have to offer benefits to as well as other factors that need to be taken care of when you hire an employee.
Getting Cash from Your Bank – The 5 C’s of Credit
One of the most common questions among small business owners seeking financing: “What will the bank be looking for from me and my business?” While every bank has its own unique criteria, many use some variation of “the five C’s of credit” when making credit decisions. Broadly speaking, they are:
- Character
- Cash Flow
- Collateral
- Capitalization, and
- Conditions
Let’s take a look at each of these ingredients and how they may impact your funding request. Review each category and see how you stack up.
Character — Your willingness to pay back your loan
What is the character of the management of the company? What is your payment history and patterns in other loans you have taken? What is management’s reputation in the industry and the community? Bankers want to lend their money with those who have impeccable credentials and references. The way you treat your employees and customers, the way you take responsibility, your timeliness in fulfilling your obligations — these are all part of the character question.
This is really about you and your personal leadership. How you conduct both your business and personal life gives the lender a clue about how you are likely to handle leadership as a CEO. It’s a banker’s responsibility to look at the downside of making a loan. Your character immediately comes into play if there is a business crisis, for example. As small business owners, our personal stamp on everything that affects our companies. Since the bank may not know you, your credit score tells the lender how you will pay your business loan. Many times, banks do not even differentiate between us and our businesses. A poor personal credit score is enough information for a lender to outright decline a business loan. In a commercial lender’s eyes, there is no differentiation between handling personal obligations or business obligations. They are one and the same.
Cash Flow— Your capacity to pay back your loan
What is your company’s borrowing history and track record of repayment? How much debt can your company handle? Will you be able to honor the obligation and repay the debt? There are numerous financial benchmarks, such as debt and liquidity ratios, that investors evaluate before advancing funds. Become familiar with the expected pattern in your industry. Some industries can take a higher debt load; others may operate with less liquidity. As a conservative guideline, you should have $2 of income (business and personal) for every $1 of debt.
Collateral — How lenders get paid if the business fails
While cash flow will nearly always be the primary source of repayment of a loan, bankers look at what they call the secondary source of repayment. Collateral represents assets that the company pledges as an alternate repayment source for the loan. Most collateral is in the form of hard assets, such as real estate and office or manufacturing equipment. Alternatively, your accounts receivable and inventory can be pledged as collateral. Generally, lenders will want a 1:1 ratio, or a $1 of collateral for every $1 you borrow. Bankers typically discount an asset and lend on that basis. So for every $1 of collateral the bank will lend anywhere from 70% to 85% of the value depending on whether it is fair market value or liquidation value.
The collateral issue is a bigger challenge for service businesses, as they have fewer hard assets to pledge. Until your business is proven, you’re nearly always going to pledge collateral. If it doesn’t come from your business, the bank will look to your personal assets. This clearly has its risks — you don’t want to be in a situation where you can lose your house because a business loan has turned sour. If you want to be borrowing from banks or other lenders, you need to think long and hard about how you’ll handle this collateral question.
Capitalization — How much money have you put into the business?
How well-capitalized is your company? How much money have you invested in the businessyou’re your business has grown, have you reinvested the profits, or paid yourself a bigger salary? Investors often want to see that you have a financial commitment and that you have put yourself at risk in the company. Both your company’s financial statements and your personal credit are keys to the capital question. If the company is operating with a negative net worth, for example, will you be prepared to add more of your own money? How far will your personal resources support both you and the business as it is growing?
Conditions — SWOT: What are the strengths, Weaknesses, Opportunities, and Threats that affect your business?
What are the current economic conditions and how is your company affected? If your business is sensitive to economic downturns, for example, the bank wants a comfort level that you’re managing productivity and expenses. What are the trends for your industry, and how does your company fit within them? Are there any economic or political hot potatoes that could negatively impact the growth of your business? (I wrote at length on SWOT analysis in my January blog, which you can find at: http://www.edwardalloncfo.com/category/budgets-strategic-plans/.)
Keep in mind that in evaluating the five C’s of credit, investors don’t give equal weight to each area. Lenders are cautious, and one weak area could offset all the other strengths you show. For example, if your industry is sensitive to economic swings, your company may have difficulty getting a loan during an economic downturn — even if all other factors are strong. And if you’re not perceived as a person of character and integrity, there’s little likelihood you’ll receive a loan, no matter how good your financial statements may be. As you can see, lenders evaluate your company as a total package, which is often more than the sum of the parts. The biggest element, however, will always be you.
Replanting Roots
I feel very fortunate that I connected to Ed for advice on developing an effective business plan for Replanting Roots, the non-profit I founded. Ed is a remarkably patient and kind man, and gently probed and challenged the plan I had written on my own before advising on how to make it more professional and poignant for the investors I will be seeking. I’m taking his advice, and reworking the plan, and look forward to getting his thoughts as we move forward in creating a dynamic social enterprise for returning citizens. Ed is an experienced, top rate professional, and would be an asset to many small businesses. I greatly appreciate the generous help and advice he has shared to help us succeed.
Harry Reisig, President, Replanting Roots
Manage Your Cash, or It Will Manage You
I recently saw a survey concerning the degree to which business owners are managing their cash flow. The results might be surprising to many in that only 20% of business owners felt they were in control of their cash flow. This means that over 80% of owners manage their business without having the necessary control over cash. Unfortunately the lack of financial control of your business can lead to devastating consequences. Compare this situation to driving down the road at night and your headlights go out. You can’t see any cars or obstructions on the road. The only hope is that you reach your destination before you are involved in a serious accident.
Anyone running a business needs a clear vision of how their business decisions affect the finances of the company to achieve the success they desire. “Cash is King” and every business owner should have a clear understanding of the financial implications of their business decisions to increase the chances of success. If you don’t take control of your cash, it will most certainly take control of you.
As a business owner you probably wear many hats: Administration, HR, Marketing/Sales, Finance, Operations and anything else necessary to ensure the success of the business. I have seen this situation many times in working with small to mid-size businesses. At some point the work that needs to be done is put off; the accounting and finance segment is usually the area that receives little attention. Over time an owner will notice he is not sure about the financial condition of the company or where the cash is going. Have you ever asked yourself the question “I am making a profit but I don’t know where the cash if going?” To find an answer to this question you spend more and more time dealing with cash flow issues rather than driving the business and increasing sales.
So what is the solution to this problem? Let’s take a look at a few areas that can help improve your control over cash.
Accounts Receivable – You need sales to replenish cash for future expenditures, but sales are not sales until they are collected. Do you have customers who are continually late in paying their invoices? If so, you have become a banker for your customer. In today’s economy, companies cannot afford to allow customers to stretch credit terms. Have new customers fill out a credit application. Information obtained in this process will alert you to possible bad pay habits and potential bad debts. Ask for credit references and check them out. Make sure your customers understand your credit terms and have them stated clearly on your invoice. Call the customers within one week of the due date of the invoice to see where it is in the customer’s payment process. A monthly statement can help with customers who have delinquent invoices, but frequent follow-up phone calls will achieve greater success for payment.
Managing from your Bank Balance – Sometimes when I ask owners if they know their cash balance they tell me certainly and state they check the balance online at the bank daily. This is an activity that will ultimately result in failure, mistakes and frustration. Remember, you reconcile your bank account and don’t manage from it. You must obtain your cash balance from your accounting system and not the bank. Your bank will not show checks that have been written and not cleared the bank nor will they show receipts that are deposits in transit to the bank. When a check is written, it is deducted from your cash balance on the books (computer or manual)….this transaction has not cleared the bank. Reconcile your accounting system with the bank account monthly to ensure that all transactions have been properly recorded in the accounting system and bank. If you follow the process as outlined, you will avoid serious and expensive mistakes.
Limitation of Financial Statements – Monthly financial statements are very important to a business as they provide a historical view of what has transpired in the company and gives the business owner a better perspective of what has contributed to a profit or loss. In fact financial statements are a must for any company. Banks and investors require you to provide them and you cannot succeed without them. However, accounting rules for creating financial statements focus on measuring profit and loss….not cash flow. The financial statements may show a loss, but have a positive cash flow and the opposite is true for a profit. As an example, certain expenses that require amortization and depreciation to be written-off are non-cash expenditures that can be added back to the net income or loss to determine cash flow.
The solution to this problem is to prepare a schedule of your actual and forecasted revenues and expenses with the beginning and ending cash balances. A schedule of this type can be prepared on a spreadsheet with columns next to each other for a comparison of revenues and expenses each month. Preparing a schedule on this basis will give you a clear picture of where your money is going.
Cash Flow Forecast – If you run your business without cash flow projections, you are flirting with disaster. Establishing cash flow projections does not have to be difficult; it is simply using a few basic principles with your intuition and knowledge of the business. Here are a few pointers you should use to create a cash flow projection that will give you the confidence to avoid problems.
- Start with at least six months of actual expenses and revenues. What has happened in the past is likely to happen in the future.
- Are there any significant changes happening now that are different from the past? If so, be sure to include them in your projection.
- Be conservative in projecting your revenues and expenses. Actual results will always vary from projections. Always be conservative here to avoid dramatic unexpected results. Never project revenues that you cannot be fairly certain will occur as this will create a false sense of security. If you can be 90% certain that cash balances will come in at or better than forecasted, the forecast is conservative.
- Once you are finished with your forecast, review it again checking cash balances. Are they in line with the actual cash balances over the last six months? If you can answer “yes” to this question then you can feel comfortable with the forecast. Following this step will allow you to uncover any unusual or unexpected results in the numbers.
- If you have never prepared a six-month forecast, start with a 13-week forecast until you feel comfortable that the numbers are starting to make sense.
Understanding your cash flow will give you peace of mind and help you start to take control of the financial side of your business. B2B CFO® is experienced in working with business owners to assist in developing cash forecasts that will lay the groundwork to avoid those unexpected demands on cash. If your company does not have a Chief Financial Officer, isn’t now the time to hire one? B2B CFO® believes that every company should have a CFO, but most cannot afford one full time. We can work with you on an as needed basis to help you meet your goals and spend more time with customers.
5 Common Small Business Challenges
| In working with small growing entrepreneurial businesses, I have discovered several common financial related issues with which they struggle. When I first start working with these businesses, most if not all of these issues exist. All of them are critical to their success in managing and growing their businesses. The good news is that with time and focus they can be rectified. In no particular order, here are 5 that I see most:
1. Lack of Timely and Accurate Financial Statements
In today’s business environment, decisions are made at a fast pace. Information is readily available via the Internet, yet internal financial information to improve the decision-making process is sadly deficient. Most business decisions have financial implications, and without this basic financial information, it may be a shot in the dark. Many times the financial statements are put in a drawer and never reviewed because the information is too old (not timely), the business owner doesn’t believe the information is correct (not accurate) or the financial statements support the preparation of the income tax return, not running the business (not operational). They usually only become important when the business owner needs to meet with the bank. 2. No Cash Management As we all know from operating a business, cash is king! It is the common denominator for all businesses NO CASH = NO BUSINESS. Other than the current cash balance (most of the time determined by looking at the bank’s balance) most small businesses don’t manage their cash. Cash management includes understanding your business’s “operating cycle” (i.e. cash to cash cycle). To improve your “operating cycle” it is imperative you understand what it means, how to calculate it, and what influences it before you can improve it. Many times I will ask “what do you expect your cash balance to be in 6 months?” Most of the time they are fighting cash flow problems today and can’t think about the future past this week. Managing cash flow will provide a real sense of control over the business. 3. Poor Pricing Management
Setting the price of our products or services will drive revenues and just as importantly the “gross margin” for the business. Unfortunately, not enough time and attention is provided to this aspect of business. In working with small business owners, I find many have not revised their “pricing formulas” for some time, while others don’t really know their underlying costs to derive a sales price that provides profit. Many products are market driven because of competition, so it is imperative to know not only the direct costs but all costs necessary to produce a profit. Gross margin analysis by product line, products or customer is critical for small businesses. 4. Lack of Systems & Processes
Processes, whether documented or not, exist in all businesses. It is the way we perform the work necessary to produce our products or services. In most small businesses, the underlying processes to accomplish the work are rarely documented or reviewed as a whole (i.e. system). Developing efficient and effective systems and processes generally reduce costs and/or improve productivity. In businesses where there is a high turnover of people, documented processes are critical for training to ensure employees achieve higher productivity quicker. 5. Minding and Grinding Not Finding
Jerry Mills, founder and CEO of B2B CFO®, developed a simplistic organizational model for small businesses. He identified the 3 roles in small business as Finders, Minders and Grinders. Grinders represent the employees whose focus is about today. They generally work in the production side of the business. Most Finders start as Grinders. The Minders live in the past; their work is in the administrative, accounting, customer service or warranty departments. Minders are just as critical as Grinders to the success of the company and must be led. All Finders live in the future. They are the visionaries, innovators, and relationship builders. They are the passion and the drive for the business to grow and succeed. The entrepreneur is the Finder and must stay in the Finding role. Unfortunately, as businesses grow the Finder gets pulled into the company and works in Minding and Grinding activities. Without a change back to the Finding role, the entrepreneur/small business owner severely limits the business’s ability to grow. In working with small business clients, they almost always identify with this organizational model. As I mentioned at the beginning of this piece, these challenges for the small business owner can be corrected. Most of them are fundamental changes. As with most challenges and the related changes, awareness is the first step. . |
The Wall Street Journal featured B2B CFO® as experts in cash flow management. 
