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True business success … or just an illusion
January 20, 2014 | By Neil Ducoff | 3 Comments
I’ve worked with businesses that, by all outward appearances, were enjoying great success. They possess good brand identities, impressive customer lists, great looking facilities, cool equipment (gotta have cool stuff) and all of the other trappings of an otherwise successful business. Their owners drive fine cars and live in impressive houses in just the right neighborhoods. But one look behind the curtain at their financial realities reveals that these companies’ successes are more illusion than fact.
I’ve seen too many of these outwardly successful businesses that are starved for cash or on the brink of financial collapse. The most desperate are financially insolvent – they don’t have the cash to meet payroll, pay the bills or make payments on their bank loans. The emotional stress can be crushing. Sadly, almost every one of these dire and stressful situations can be attributed to leadership’s detachment from the financial reality of the business. A leader who is not fiscally responsible permits that thinking and behavior to infect and define the very culture of the company. That “just keep selling – we’ll be OK” rationale is pure denial at its best. It’s like announcing that the train won’t crash while not knowing what track you’re on, where it’s going or where it ends. Only your financials tell you if the light at the end of the tunnel is daylight or an oncoming train.
Here are some no-compromise strategies that will ensure fiscal accountability, sustainable profitability and the security of cash reserves:
- Can you read and understand every line item on your financial reports? This includes your Balance Sheet, Income Statement and Statement of Cash Flows. If not, what’s your plan to learn how? Financial reports are readouts of your company’s vital signs. They tell you if your company is healthy or sick. Understanding your financial reports is non-negotiable.
- How often do you receive complete financial reports? If it’s not at least monthly (that’s only 12 sets of financials a year), it is not often enough. Weekly is better. I’ll explain why later.
- How much time lapses from the end of the month until you receive your financial reports? If it exceeds two weeks, it’s too long. Find out where the roadblock is and address it. If you have in-house accounting, there’s no excuse not to have timely reports within days after the end of the month. Any good in-house accounting software and a competent bookkeeper should be able to produce timely financials. This is non-negotiable.
- Do you have a cash-flow plan that guides your revenue targets and expense budgets? If not, why not? Financial reports tell you the score during and after the game ends. Your cash-flow plan is your financial playbook. Follow the plan, be fiscally responsible and your financial reports will show a healthier company. You simply cannot grow a business without following a cash-flow plan. The plan is a “best guess.” The more you do it and work your plan, the better you predict the future. This is non-negotiable.
- Do you have weekly cash-flow planning meetings? If not, why not? Having a cash-flow plan is pointless without comparing it to actual revenues and expenses. Are you over or behind projections? Why? What do you need to do today or over the next week, month or quarter to get back on track? This is why I prefer weekly over monthly financials. I don’t want to discover a problem at the end of the month that we could have fixed or avoided today. Just 30 minutes a week with decision makers can lead to greater profits and cash reserves. Do it.
- Who attends your weekly cash-flow planning meetings? All leaders need to be present. In larger companies with many departments, separate cash-flow meetings focusing on numbers that are key to that area need to be held weekly. If you’re still freaked out about sharing your company’s financial reality – get over it. Financial literacy is about teaching people what “reality” is. Otherwise it’s just “perception.”
- Do employees know the score? If your response to, “Hey boss, how are we doing?” is something like, “Not good enough,” you’re setting up your team for failure. You’re keeping the people responsible for doing the work in the dark by being vague. People want to make a difference. How can they make a difference if they don’t know the numbers?
- If it’s not in the cash-flow plan, don’t spend it. Buy the “gotta haves” before the “nice to haves.” Does your company require purchase orders to control spending? Your cash-flow plan is your boss.
- Is your payroll percentage under control? What is the ideal target payroll percent for your company? What will it take to achieve and maintain that target? Is your pay system controllable? Commission-based systems are extremely difficult to control or adjust to the inevitable increases in operating costs. Do you need to make some tough decisions?
- Are your inventory levels under control? Money tied up in excess inventory is a cash drain. What’s the plan to get it under control?
- If you’re a retail business, are you controlling inventory levels and turning your inventory as often as you need to? Slow inventory turns in retail kills cash flow.
- As the leader of your company, department or division, are you setting the right example to create a fiscally responsible business culture? If not, why not?
There is no debating that profitability begins with the right culture. Creating sustainable and predictable profitability begins with the right discipline and behavior at the leadership level. It cannot be faked. The no-compromise leader lives it, inspires it and relentlessly builds a culture to support it.
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