Financial Management

profit

Why cash is more important than profit

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What does it take to make a success of your small business… how can you avoid adding to those frightening statistics about failure rates of small business. 

In this series of articles and associated webinars and workshops, by Roland Hanekroot you will learn the basic concepts and get the knowledge you need to become a successful ‘Business-Owner’, as opposed to a struggling ‘Business-Doer’.

Format

The format of each episode in the “First Steps” series is to explain the basics of the topic and then in line with the principles of New Perspectives business development programs, to suggest some small simple “First Steps” you can take straight away to put the knowledge into action.

Financial Management

profitIn the fourth of these articles we’ll look at the Financial Management and ask:

What do you need to know and how do you need to apply that knowledge to put your business on a solid financial footing?

3 Principles

There are 3 principles you need to understand to manage the finances of a business well:

1)    Why do we need to make profit?

2)    Profit and cash are not the same thing at all and they don’t even have a direct relationship between each other.

3)    Cash is what you must worry about all the time… not profit

Why Profit?

Let’s address the principle about Profit first. The first thing to understand about profit is that it is not the purpose of business. Profit is a vital component of business, but it isn’t the reason the business exists. The Purpose of your business must be something much more important and something your customers actually care about. (More about this idea in my article about Purpose and Vision click here)

Why Profit?

Let’s address the principle about Profit first. The first thing to understand about profit is that it is not the purpose of business. Profit is a vital component of business, but it isn’t the reason the business exists. The Purpose of your business must be something much more important and something your customers actually care about. (More about this idea in my article about Purpose and Vision click here)

The 3 Functions of Profit

Profit has 3 functions:

1)    To pay investors and stake holders in a business a return on their investment.

2)    To provide the business with funds to invest in itself to grow or develop the business.

3)    As the thing by which we measure how well we are doing in running the business.

The first function is straight forward, if someone invests $100 or an hour’s work into a venture, that person wants to see a return for that investment. That return can only be payed out of the profits of the business.

The second function is also straight forward, in that, if you want to buy a new machine or tool or vehicle for your business you need to have the money to pay for that. Profit is what provides that money. (You can borrow for that purchase of course, but then the purchase is effectively made out of future profits)

The third function is about this: How do we know if our business is going well or not so well? The simplest method to answer that question is to keep track of the financial numbers and profit is one of the most important of those.

Profit and Cash

The second principle about profit and cash is what brings a lot of small businesses unstuck. A large proportion of the businesses that make up the horrendous statistics on failures in small business do so because of a lack of understanding of this principle.

Profit is a simple sum (on paper) of sales minus costs. So if you sell stuff in a week for a $100 and it costs you $50 in raw materials that week and $25 in office costs, it means that you have made $25 profit that week.

river Cash (your bank balance) bears little relation to those numbers in most cases. The $100 of stuff you have sold might not be paid for that week or even that month. You also might have had to pay for the raw materials some time previously and your office costs (staff and rent etc) may have to be paid every Friday. So that at the end of the week your bank account will actually be significantly in the red even though you’ve made a profit.

Cash Flow

So cash needs to be calculated in a different and slightly more complicated manner than the simple profit and loss equation.

When thinking about cash it is useful to think in terms of flow… money flowing in and out of your account, like a river flowing into the sea. If it rains upstream in Queensland for example, it may take a month for the Darling River to start swelling downstream in South Australia. So when talking about cash we usually talk about cash flow…. Money flowing in and money flowing out. If more money flows into your bank account in a given period than flows out in that period, your bank account swells and vice versa.

Cash is the main thing

cat And that brings us to the third principle that you need to understand about financial management of the business.

I said that the thing to worry about in your business is Cash and not Profit. For most people this is a counterintuitive statement.

The truth of this principle is actually much more straight-forward than you might think, because:

Only cash can be used to pay for stuff

Theoretically, your business may never make a profit and yet survive, as long as you continue to have enough cash to pay the bills, your staff, your raw materials, the rent etc. Obviously without making a profit, the business will ultimately run out of cash, but that can take years in some circumstances. So as a business owner who is committed to put his business on a solid financial footing, Cash-flow must always be your first concern.

This is the topic we will be talking about at the March Small Business Masterminds ‘live’ workshop as well as the Masterminds online webinar, both on 13 March. If you would like to attend either the webinar or the workshop, go to http://smallbusinessmasterminds.com.au 

Take the first steps:

As mentioned in the opening paragraphs of this article, I will suggest some “First Steps” actions you can take right away, that will get you started on implementing the topics and principles we discuss:

  1. Download the Article by Roland Hanekroot: “Cash-flow, the Basics”: follow this link
  2. Have a look at a great blog post on the Times of London about the importance of profit in business: Follow this link
  3. 5 ways to improve your cashflow in INC magazine: Follow this link
  4. If you are not already doing so, start by paying yourself a regular “wage”. A weekly or monthly amount you can live on as a minimum, and record this wage in your books as an expense to the business. You may decide to invest this money back into the business if you don’t need it to live on, but by paying yourself such a wage you will gain a more accurate insight into the profitability of the business and you will start to see how much money you are actually investing into the business and therefore should get a “return” on in the future.
  5. Start a proper bookkeeping program (Xero, MYOB, Quickbooks, Saasu, Freshbooks) and ensure it gets kept up to date at least monthly.
  6. Ask your accountant or bookkeeper for a simple cashflow spreadsheet and either start to use it yourself monthly or ask your bookkeeper to do so for you, you’ll be surprised how easy it is to start to get a handle on the cash flowing in and out of your bank account.

About the author and the Masterminds sessions

roland

Roland Hanekroot is a business coach who works with Small business owners to help them have more Fun in their businesses and build businesses that sustain them for years to come. Roland is also the author of “The Ten Truths books for Business owners” (more about the books here: http://thetentruths.com.au)

Every month Roland Hanekroot runs a business development workshop as well as a webinar called “The Small Business Masterminds” more information here and to register for the next webinar or workshop, follow this link: http://smallbusinessmasterminds.com.au/ The first time is free.

 

Business Plans That Work

Business plans that work.

A business without a plan achieves everything in it.

What does it take to make a success of your small business… how can you avoid adding to those frightening statistics about failure rates of small business?

In this series of articles and associated webinars and workshops, you will learn the basic concepts and get the knowledge you need to become a successful ‘Business-Owner’, as opposed to a struggling ‘Business-Doer’, and build a business that sustains you for years to come.

The First Steps Format

The format of each episode in the “First Steps” series is to explain the basics of the topic and then to suggest some “First Steps” you can take straight away to put the knowledge into action. The previous articles On Purpose, Financial Management, Marketing and Sales can be found in the archive on the blog.

In the fifth of these articles we’ll look at Planning and ask:
Why do so few business owners have a business plan, or if they do have one, why don’t they look at it more often, and how can we create a plan that does make a difference?

planning I bet you actually have a business plan. You probably created it with the help of your accountant or by following a template you downloaded from a government website somewhere. You filled in the blanks and fiddled with it a bit. It made the bank happy. It looks great and when you finished it, you felt proud to hold it in your hand. But when was the last time you even looked at the thing?

We all know the mantra: If you want to build a successful business, you must have a Business Plan.

I completely agree with that mantra, but does that mean that a business with a “Plan” will by default be successful?

No, obviously not. Most business plans don’t actually have much of an impact on the success of a business, because their format and content is irrelevant for business owners and their staff.

So how do you write a business plan that is relevant for you and your business? A business plan that is your most powerful tool to guide the direction and development of your business?

Business Bedtime Story, Laura

Here is one of my Business Bedtime Stories that illustrates how to think about planning. The Story is about one of my clients, Laura.

fashion Once upon a time… a long long time ago in a country not unlike Australia… Laura had a fashion label…

Laura had a little shop in Sydney and a fashion label and a small dedicated band of followers for her unique brand of office fashion for successful corporate women.
Laura’s business was 4 years old and although it was gratifying to see the same customers come back season after season for her latest lines and to know how happy her customers usually were when they left her shop, Laura felt strongly that there was a great opportunity for her to grow the business and bring her unique designs to a larger audience, but she just didn’t know where to start.

“Should I get involved in social media, or maybe I need to take the plunge and open a shop in the CBD or should I look for a partner in Melbourne or knock on the door of Myer, and how will I finance an expansion, and can I continue to manufacture in Australia, and what if I am not good enough to manage more staff and various localities, and is the market in Perth the same as the market in Sydney, and what if Cue designs simply decides to knock off my designs, and if I grow will I lose the loyalty of my customers” ? etc etc

Paralysis

act-plan-do Laura was stuck in a classic decision paralysis loop.

Working with me, Laura came to realise that the only way to cut through her dilemma’s was to face her lack of confidence in business planning head on write a thorough Business Plan, but in a form that worked for her.

So she did. Laura started by creating a big mind-map in which she wrote down all the dilemmas and questions and then she systematically ordered them, prioritised them and answered them.

The mind-map evolved to a series of small one page documents for different aspects of the business and a time line with projections for different stages of the business development.

A place for all the questions

From there Laura simply started to work progressively through the plan, and every time another question or dilemma came up she went to the plan, and found a place to house the question. This simple process of planning allowed her to be able to focus on the immediate step ahead without being afraid that she would forget something crucial.

Making this step to getting involved in an appropriate level of consistent planning is the one thing that started to shift Laura’s business into a new realm.
Image: Shopping for free on Kurfuerstendamm in Berlin 1.5 Years later, Laura had opened a second shop in Sydney. The planning process helped her understand that her opportunities in the short to medium term were not in the CBD, nor in large scale production off-shore, but in a series of small unique shops in specific inner city suburbs like Balmain and Mosman, followed by similar expansion in Melbourne and other major cities in Australia.

Laura was looking forward to the next 5 years of consistent controlled growth and building a loyal national following of her label.

And Laura lived happily ever after… The End

The lessons

Let’s examine Laura’s lessons.
We’ll start at the beginning. Why do we need a “Business Plan”?

The purpose of creating and having a business plan is threefold:
1)    To spell out exactly where the business is headed and how it will get there.
2)    To have a fixed set of criteria to “test” every decision in the business against.
3)    To know your options and to be able to make swift and accurate decisions when your business circumstances change from the ones you planned for.

If your Business Plan is designed with those three principles in mind, you can be sure it won’t be kept in the bottom of a drawer. It will sit on top of your desk; it will be dog-eared, and smudged; it will have coffee stains, scribbles and doodles all over it. You will look at it every day and so will everyone else who has anything to do with it.

Business Plans that live

There are 6 key criteria that a Business Plan must meet for it to truly add to the success of the business:
1)    It must be a “live” document and be kept “live” by the people directly affected by it, monthly, quarterly, annually.
2)    It must be designed with the people who are directly affected by it in mind.
3)    It must be easy to use and easily accessible for the people directly affected by it.
4)    It must be designed to address the short, medium and long-term goals of the business.
5)    It must reflect the Purpose and Mission of the Business (see last month’s topic article on my blog)
6)    It must be short… on page… ideally.

On the special resources page for this topic (follow this link) are a couple of simple templates that you can download and work your way through to create a business plan that meets these 6 criteria. All of the templates are designed to fit on one page.

None of the templates on the resources page are for business plans designed to go to the bank with. Those plans are external plans. The plans I talk about in this article and the plan that Laura created are internal plans, their function is to help you and your people drive the business to where you want it to go.

Your First Steps:

As usual in this series of articles I want to encourage you to take action. To get started with creating a business plan that is going to help you build a business that sustains you for years to come, the first step is to follow the link to the special resources for this article and download the two templates. There are also a couple of articles about planning from two internationally renowned business gurus you may want to read.

Step 2 is to get started. Put aside an hour to get familiar with either of the templates. Alternatively you might prefer Laura’s approach or you may decide on a different format altogether. It doesn’t matter, as long as you get started.

roland I’d love to hear how you go, email me your first draft or feel free to contact me with any questions.

The Masterminds sessions.

Every month I run a business development workshop as well as a webinar called “The Small Business Masterminds”. In December our topic for the Masterminds sessions is business planning and how to write a plan that works. For more information and to register for the next webinar or workshop, follow this link. First time free, normally $99

(By the way. Feel free to email me if you do want a good external business plan template to apply for an overdraft with.)

Masterminds Observations…Passion and Purpose

rework

Masterminds Observations…Passion and Purpose

If you enjoy this article click here to get a copy of one of the “The Ten Truths” books for business owners for free

One of my favourite books is “Rework” by Jason Fried and David Heinemeier Hansson, founders of software company 37Signals. In the reworkchapter “Building to Flip is Building to Flop” they say this: “When you build a company with the intention of selling it, you focus on the wrong things. Instead of focusing on getting customers to Love you, you worry about who is going to buy you. That is the wrong thing to obsess over”

That is exactly what I think when I hear all the gurus and business coaches talking about the exit strategies and the need to focus on that.

There is only one thing to focus on every day when you want to start a business, and that is: How do I build something that my customers will love more than any other business out there?

All the greatest and most Fun small businesses that have ever been built, ask themselves one question, every day: “What else would my customers love?”

If you focus on that and nothing else, everything will fall into place and you’ll have as much Fun as you can handle

Masterminds Observations… More Meetings

verne harnish

verne harnish Business Masterminds Observations

 

Predictability

If you enjoy this article click here to get a copy of one of the “The Ten Truths” books for business owners for free

Another thought about the Rhythm of business and how to make business as predictable as possible from Verne Harnish’ book: “Mastering The Rockefeller Habits”.

Link to Amazon: http://amzn.com/0978774949

Verne says to have more meetings, not less.

Verne believes quarterly strategy meetings with your staff are not enough. You need to have a monthly, weekly and even daily schedule of meetings to ensure that the strategies and deliverables from the less frequent planning meetings are actually carried out.

I know that many management gurus would baulk at that statement, because the amount of money and time wasted in business in meetings is staggering.

But Verne is right. Strategies and plans without regular, formal and structured follow up meetings, never lead to the outcomes you’d hoped.

Do learn how to make your meetings super-efficient though (For example, I know of a company where all meetings are held standing up, so that the meetings don’t take a minute longer than absolutely necessary).

Masterminds Observations… Lunch

verne harnish Business Masterminds Observations

 

Predictability

If you enjoy this article click here to get a copy of one of the “The Ten Truths” books for business owners for free

I read Verne Harnish ‘Mastering the Rockefeller Habits’ on camping holiday a year and half ago.

Thinking about the Rhythm of business and focusing on making business as predictable as possible, Verne relates how the famous John D Rockefeller had lunch with his key people, every day. Verne says: “Consciously or not, Rockefeller understood that the word company means: To Share Bread. He knew that by gathering his top people every day for a meal that their professional and personal relationships would be strengthened.”

I love that quote by Verne Harnish, because I think it is really useful be reminded what the word company actually means. It is absolutely about a group of people – we are in company with people, we don’t create and run a company on our own, it is all about the people.

Masterminds observations… Love over Hate

Love over Hate

Love over Hate Business Masterminds Observations

 

The illusion of “The Power of One”

I am reading “Love over Hate, finding life by the wayside” link to the book by Graham Long, pastor and CEO of the Wayside Chapel in Sydney .This is a passage that stood out for me particularly:

“The idea that the basic human unit is a solitary individual is the established orthodoxy of the Western World. It’s an illusion and an attractive one at that, often presenting itself as “The power of one”. The power of this illusion is in its promise to an insecure individual that a dream and some willpower is all that is required to overcome life’s obstacles. It promises an individual can triumph over adversity as well as any competitors who get in the way of the prize of justice, fame, wealth or whatever other virtue is implied by the dream.”

It’s all upside down

What this says to me amongst many other things is that we (and I include myself firmly in that “we”) have got it all wrong. The library of work in books, blogs, seminars, videos and everything else by the gurus of the business growth, as well as personal development world repeat the refrain of the Power of the individual and that “The answer is within”… even in the world of religion we hear “The Kindom of God is within”… All of that is nonsense.

To me, that paragraph and the rest of the book and several other books I have been reading in the last year, have convinced me that I have to throw out the rule book, and start again… let me know what you think!

Time Management

Business Masterminds Observations

Time management for smart business owners:

double your profitsHere is a brilliant anecdote from “Double your profits in 6 months or less” by Bob Fifer. (Link to the book)

The book is full of brilliant tips and advice, I highly recommend any business owner to read it and then put stuff into action.

This about time management: “The first thing I do when I get to work in the morning is to divide everything I have to do into three lists. List 1 holds only items that brings in new business or reduces costs. List 2 includes the things I have to do to maintain existing business or to keep an internal operating process running. List 3 includes all the things that someone else expects or wants me to do but add no value to the bottom line.
I always start on list 1 and will not proceed to any item on list 2 until all of list 1 is complete and I will not start list 3 until list 2 is complete.”

I love the simplicity of this approach and one of the brilliant benefits of this process is that the most important stuff gets done when you are at your freshest and most efficient. And when you go home at night, you know that you’ve done all the stuff that matters most, even if you haven’t completed all three lists entirely.

Masterminds Observations – Responsibility

Business Masterminds Observations

bullet proof
Responsibility

I recently read “Bullet Proof your business now” by Australia’s leading business writer, Andrew Griffiths. click hereA number of passages jumped out at me, but this one in particular stood out:

“So without doubt, the first step in bullet proofing any business is to step up and take responsibility for everything the business does: bills, staff, products, liabilities, ethics, debts, taxes”

I love the straight, no nonsense sentiment of that statement by Andrew (and that is by the way the tone of the whole book). Too often we get tempted to blame the government, gen Y, our spouses, the world economy or cheap overseas imports for the ups and downs of our businesses and for that matter our lives.

Time to step up and acknowledge that our business is what it is because of Who we are… today.
So if your business isn’t quite where you’d like it to be… talk to the person responsible…

In the mirror.

Masterminds observations… Small is the New Big by Seth Godin

 

small is the new bigI came across this quote by Seth Godin in “Small is the new Big”

 

“Too many companies believe that their owners would have them make schlock and alienate their customers for the sake of profit…”

 

Odd really… As human beings, we are prepared to make and do stuff that just isn’t all that remarkable, but when we are the customer ourselves, we expect even the item we’ve bought at a knock down bargain price to be perfect in all respects. Why do we allow ourselves to be tempted to think that “close enough is good enough”?

 

 


Masterminds Observations… Small Giants

My Thoughts about a quote from “Small Giants, companies that choose to be Great instead of Big”, by Bo Burlingham.

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