This is a story about cashflow, profitability, record keeping and when to seek advice. It happened to me last week but actually I have seen it before and it happens every day right across Australia. It demonstrates some simple lessons which every business owner can learn from – regardless of whether they are managing a start-up or a mature business.
So here is the good. I was asked by a young businesswoman to spend two hours with her explaining the fundamentals of setting up a business. Most of the questions related to “housekeeping”, how to keep records, how to use a simple ledger, what reports to use and how often, how to account for GST and ensure you set enough cash aside to settle your BAS, how to retain enough cash in the business to fund working capital and how to make sure your keep personal and business finances separate.
We discussed some other stuff too but this young businesswoman was keen on getting into the habit of good business management right from the beginning. This means she won’t have to start thinking about this stuff if things get messy - and they’re less likely to get messy because she’s developing good habits from day one. Like every other start up I have met she is excited about her new business. She is not excited by the “mundane” aspects of managing a business well, but she understands how important it is. I think she has laid a good foundation for success.
Now for the bad. A business owner contacted me because he had a cashflow problem despite doubling his revenue in the past 18 months. This problem was so bad that he hadn’t paid himself for several months and was living off his savings. He seemed a regular decent guy and he felt a responsibility to his staff and their families and was doing his best to juggle his creditors. His books weren’t up to date and he looked at his P&L “about every three months”. He was managing his finances from a bank statement.
Fortunately he had a reasonable understanding of where his staff are working and how his assets are utilised. We scribbled this information down and were able to segment his revenue, allocate his resources to key customers and identify the major cause of his problem: growth is consuming some of his working capital but the real problem is that his major customer is unprofitable. He will have to take a bit more pain to put his business back on track but I believe things will come right. Because this man accepted he had a problem and sought help before things really came to the crunch he should be able to turn his business around. It is unfortunate that he has gone through this pain because it was unnecessary. Had he called on the services of an advisor earlier he would have avoided a lot of it – as well as many sleepless nights.
Unfortunately there is also the ugly. This could also have been avoided and it’s a story that does not have a happy ending. A third business owner contacted me and he was incurring bad losses with even worse cashflow plus high levels of debt. His business was almost ten years old and had been suffering for the past two years. The business owner believed the solution was to work harder and borrow more money. He was very optimistic about turning things round but his bank didn’t see it that way.
This man is a regular family guy and he is proud of the service he provided to the community. I know his service was great because I had employed him to do some work for me about two years ago and he did a first class job. His problem however was that his focus on great service and hard work was not enough. He also needed to understand his finances. Despite his optimism he could not tell me his breakeven sales or his current level of debt (including creditors) or how much his business had been costing him over the past 12 months. Neither could he tell me where he would get his sales from if he worked harder. This man needed a plan but he needed it two years ago, not now. It’s too late.
Being in business can be hard and the moral of this story is that you are unlikely to succeed by yourself. Successful business people surround themselves by others who know things they don’t know, have skills they don’t have or like doing things they don’t like doing. They build a team around them and importantly, when they have a problem, they’re not afraid of asking people to help them. They do this sooner rather than later.
There are many good businesses out there but there are also too many bad and ugly ones which don’t need to be that way. Look in the mirror and take some time to reflect on your own business by considering the three things below.
1 You can’t be successful just by working hard and focusing on customer service. My next blog will discuss three things that, as a minimum, you need to do well to manage your business successfully.
2 You are in business to make money. The only way to understand how well you are doing this is to keep your accounts up to date, to understand them, review them frequently and act on what they are telling you.
3 We are all human, none of us can be good at everything. Don’t ignore the things you don’t feel comfortable doing or that you don’t understand. When you have a problem get someone to help you.
Is your business good, bad or getting ugly? If you don’t like what you see find someone who can help you.