This blog is
covering number four of the Ten Core Business Practices. There are three in one
here: Financial Analysis is one, Reporting is two and Capital Management is
number three. I’ll start this with a story. The first time I went into an
executive position, it was for a dot.com and I had been promoted from a sales
position. I was an officer in the company. If you don't know exactly what an
officer of the company means, it's pretty much what you're doing as a small
business owner. It means that you primarily have responsibility for a huge
portion of the business; that you are the one that's being held accountable.
And if you own the company, then you, by definition, are an officer of or
principal as evidenced by your name on all of the legal documents according to
your articles of incorporation. My boss at the time had a lot of confidence in
me. But one of the things that he was always a stickler about was “did I know
my numbers”? And you know, being a person that had always prided myself on
being able to figure out how to get it done, my operating premise was that if
we did all the right things, the numbers were going to be what they were going
to be. Boy was I wrong. I had to learn the hard way. If you are going to run
your business, you need to know your numbers. You can pick and choose which
numbers you need to know, but you need to primarily know what your current
profitability is; what the current costs to operate your business are; what you
expect as the revenue to come in on a given day, on a given week, on a given
Clearly, as a business owner, you need to know how much money you have in the bank. These are things that you need to commit to memory. And the simple thinking behind this is - if you don't know your numbers - how can you possibly know what you're managing? If you have a business and you say, “okay, I have a modest goal, I want to hit 100,000 in sales, 500,000 in sales, a million, 10 million” -- doesn't really matter what it is -- how do you know that you're going to hit that number if you aren't keeping track of what's going on daily or weekly or monthly? How do you know what type of investments you need to make? How do you know when you need to change your strategy? How do you know if your people are doing what they need to do or if there's any one particular person that you need to provide some assistance or coaching or guidance to or potentially remove if you're not looking at your numbers? How do you have any indicators as to whether or not things are trending in the right or wrong direction?
It was a tough lesson for me to learn because I got caught in a meeting and everybody was going around the room talking about what their numbers were and I couldn't recall mine. I looked over at the CFO. He was not going to throw me a lifeline, and the CEO of the company was like, don't let that ever happen again and I didn't. I didn't.
If it's a business that you are dead serious about, if it’s a business you are building your future on, then it's worth knowing your numbers. Now, that gets you into the whole notion of financial analysis because what you're going to quickly discover is which numbers matter for your business. If you're going to ramp up and stock up for inventory, how do you know how much working capital you need? Do you need a 25% increase in working capital to get you through the holidays based on anticipated demand?
something interesting in the newspaper. One of the major retailers in the US - a
huge department store - said they are going to hire 100,000 new employees just
to get them through the year. So, what do you think would be the additional
amount of money that they need to put aside in order just to hire and onboard
that many people? What do you think they are projecting as the potential sales in
order to cover that cost and get them a profit margin that makes sense? If they
have a working capital line of credit at the bank that they can draw down on
they have to be able to go in and demonstrate that they understand their
business. They know their numbers. They have some financial analysis that shows
what the costs are for the expected amount of money that they need to draw
down, use or borrow, what the revenue is going to be and what kind of
profitability is going to happen. When you talk to someone and they can tell
you in detail with confidence what it is that's going on with their business,
you have a good sense that they know what they're doing. And so financial
analysis is a core business process. You can't run your business without it.
If you have
a service-based business, how aware are you of your actual operating costs?
Your people costs? Any equipment that those people need and any additional
service that you need to support them? How much time they are spending on site?
How productive are they on a per person or per unit basis? What's your
profitability for each hour billed or for each project served? This speaks to your
ability to understand whether or not you're going to make target for what you
thought the business could accomplish within a given period. If you look at
simple accounting packages, you start getting into cash flow analysis. You get
into profit and loss detail, and you get into profitability by customer,
profitability by contract, profitability by operations or business unit or a
task or activity.
You start getting into just a whole host of costs. And, under reporting, you have a whole host of key performance indexes or KPIs that also tell you what's going on in the business. This is an area where, once someone sees that you know what's going on in your business, they feel they can trust you to handle their business and reporting becomes a huge differentiator. It's extremely important for services, but even more so for products. The big issue with products comes along the line that most customers do not have measurements in place that measure your company's activity more precisely than how you measure it. For most of them, it's not their core business. So, what that translates to is that you probably have better measurement and better metrics on what you sell than your customer does. Now I'm going to walk you through how that was beneficial for me as a buyer. Anytime I was getting ready to go out for bid, anytime I was getting ready to develop a request for proposal, request for information or to develop a market basket, I would always go to my top suppliers. And I would ask them if they had usage reports for what I purchased. Now you might go, “well, gosh, you worked for a big company, you guys had that”. We did, and it was garbage.
And invariably client data is garbage. You need to know that, better than 50% of the time, client data is garbage. Businesses ask vendors for information because their data is more accurate. A lot of times what happens with big companies is they have legacy computer systems, legacy data systems, and oftentimes manufacturers refer to products with slightly different names or they'll have different part numbers for identical products. Take something like a AAA battery for one company. They may have a part number that could be one-two-three- four-five-six-seven. Another company may call it Al Apple-one-two-three-seven. Another company might go by a uniform product code which is an altogether different number. So, in the customer's data, that AAA battery can have three different numbers tied to it. It could have been coded in a whole host of different ways in your system, in your inventory management system, in your purchasing system, in whatever database.
supplier, if you have good information about your inventory, good information
about your people, you are in a fantastic position to give better information
to your customer about what it's really costing them to use your product or
service. You can provide them with more accurate information on what their true
usage is: which are their fast-moving items; which are their slow moving items;
which are their almost nonexistent moving items because you need to know that
in order to sell, to put the right profit margin on your items. Something
that's fast moving, you might not take as much profit on because you've got
volume going in your favor; you might take a slightly higher profit margin on something
that's a medium moving item because of staying in your inventory longer. You
most certainly are going to have a higher price on slow moving items because
you have inventory carrying costs for them to sit on your shelf. You have data
that supports how quickly it's moving through your inventory and that allows
you to maintain competitive pricing. The information that you have about that
makes you an expert in your field when you talk to your customers.
that a good reporting system becomes a core business process is, along with
financial analysis, it speaks to your knowledge around your industry, your
business, your product, your service, so that when you talk to someone, you speak
with expertise and with confidence and with knowledge backed by data and by
metrics. Your customers then surmise that they can trust you to be a part of their
Capital management is the third piece of this core business practice. You have to be able to understand how much working capital you need in order to make sure that you have business continuity, that your business actually stays in business and that you have enough capital to plan for increases in production, for instance if the holiday season is coming up. There are a lot of industries that support the holiday season. Pick any industry and what you start seeing is there are going to be certain times of the year where there are huge demands on your business and you have to make sure that you have sufficient capital in order to fund that.
time to talk to a bank about money is when you don't need it. If your company
is doing extremely well right now, go talk to a banker about funding your small
business. In the previous blog on funding your business, I listed some 15 or 20
different sources of funding that you can use. If you have already prearranged
with a bank to provide for your working capital requirements, then when some of
those crunch times come, but you still have to make some investments, you will have
a line to draw on.
have that in place beforehand, your ability to make all of this transparent and
seamless to your customer is huge. If they suddenly have a huge capital project
and they need to buy 20, 30, 50% or two times more from you than they've had to
previously, it's one thing if you just say to them, “Hey, not a problem. We
anticipated this; we have it covered. Let's sit down and talk through how we're
going to do it”, versus your saying, “uh, I think we can do that, but it's
going to be tight. It's going to be a little tough”. That does not inspire
confidence at all, none whatsoever. So, to the extent that you have done the
work and you have a good idea of what your capital requirements are -- whether
you need to build a new facility, expand a plant, or any other expenditure --
your knowledge of working capital and capital management is a huge advantage.
Are these things important? Yes, they are. They tell a customer that you know what you're doing; that they can trust you. Do you have to have them to make money? Absolutely. This one is not optional. You cannot make money without doing this one. There are a lot of resources on how to manage these three areas available to you. You can talk to your accountant; you can touch base with the small business association; you can come on our campus and we can get you some more information. If you don't have an accountant or a CFO or somebody on staff just yet, a good working relationship with your banker is an excellent alternative.
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