Following on from my previous post I thought I would concentrate on cash flow as a particular area you need to focus attention on.
Many business owners don’t know how much money is in their bank account on a day to day basis and look at their accounts only once a year, so the idea of forecasting for the future leaves them cold.
Many businesses of all sizes fail because they do not have the foresight to ensure that they avoid making poor decisions, or react too late to changing circumstances. In particular, in not doing cash flow forecasting (at the very least) these business owners are putting their businesses at real risk.
Forecasting forward can help ensure you don’t suddenly run out of money. If things are going badly you at least have forewarning of when you MUST get some money in and have time to do something about it. You can then use your forecast to help the bank – or any other parties you are hoping to secure funding from – understand your business and who investing in your business is a good bet for them.
Many owners/managers of small businesses (and larger ones for that matter) struggle to understand their business finances. This lack of understanding can make it very difficult for them to make the right decisions for their business.
Now, I am sure my accounting colleagues would not mind me saying that, most accountants make lousy entrepreneurs. We just lack the creativity and drive which makes entrepreneurs so effective at getting new business ideas off the ground.
So why should entrepreneurs/business owners be great accountants?
Each role requires an entirely different skill set and way of working and, indeed, a different personality type (if you are familiar with DISC profiling). So don’t be shy about admitting that you are stuggeling with the money side of your business.
Many business owners do not seek the proper help and guidance, or have the right level of financial information, to help them make decision. To me this is a huge mistake which can lead directly to business failure. As a responsible business owner/entrepreneur you do not need to be a trained accountant but you do need to have enough knowledge of financial issues to run your business effectively.
So what do you need to do to get this knowledge? Well, for starters:
Ask lots of questions of your accountant about why the figures are as they are.
If you only receive figures from your accountant once a year, several months after the year has finished, this is not enough! You need to have regularly updated financial information to make decisions on a timely manner.
Have a properly thought through profit and loss and cash flow forecast so you can manage your cash – and make sure it is regularly updated for what has actually happened.
Don’t just be happy with knowing how much you have sold in total and the margin on this total figure. Ask how you can get information on individual customers, products and projects so you are clear which activities are profitable – and which not.
It is not good enough these days to just shrug and say “Well, I am just not good with figures”. You started your business to make a living for yourself, and any staff you have, and you owe it to yourself, and them, to have a good handle on the money in your business.