1001 Business Bedtime Stories… Amanda Manages Her Finances and Makes Money

 

Truth 4 financial management
Truth 4 – Financial Management

1001 Business Bedtime Stories… Truth 4, Financial Management

Amanda Owns a boutique hotel and learns to manage her finances so that she starts to make money and have a lot more fun.

Once upon a time… a long, long time ago in a country not unlike Australia…

Amanda owned a small boutique hotel in the inner city.

Amanda’s hotel relied on five different corporate accounts for a significant percentage of its annual revenue. The room rates that Amanda charged these corporate customers was fairly heavily discounted, and payment arrangements varied widely between the five accounts, with some bills being settled on the spot and others on payment terms up to 90 days.

Even though her occupancy rates were very high, Amanda struggled to pay her bills and wages most months.

Clearly something wasn’t stacking up. Two obvious conclusion might have been that either her costs were too high or her rates too low. But Amanda knew that her rates were in line with similar properties in the city and she managed her costs tightly.

Each week Amanda thought, “If it is neither my prices nor my costs that I need to change, what else is open to me?”

Amanda was going grey.

The Bootcamp

Working in The Bootcamp with me, Amanda came to appreciate the difference between turnover, profit and cash, and that she needed to give equal attention to all three. Amanda also came to have a better appreciation of her ‘break-even’ point.

It was time for Amanda to set up proper controls for all three financial factors and to set in place a minimum break-even point below which it was simply not possible to go.

So she did… and it took a lot of courage.

Through working in The Bootcamp, Amanda developed a series of financial reports that showed her monthly cash was short because all her profit and working capital was tied up in corporate accounts that were paid between 30 and 90 days.

Amanda also worked out that the minimum room rate she could charge and still break even was $115 per night at 100% occupancy rate, or $145 per night at 75% occupancy, but only if the bill was settled on the spot. Rooms that were paid for at 30, 60 or 90 days would need to have significantly higher rates.

Armed with this knowledge Amanda was able to negotiate better terms and rates with four of the corporate accounts. The fifth one didn’t want to come to the party and, although it felt like the scariest thing she ever did, Amanda stuck to her guns and stopped doing business with this company.

In a matter of four months, things started to turn around and Amanda’s bank account now looks healthier than it has in years. Through the process Amanda has actually gained two new corporate accounts, both of which settle their bills weekly with a corporate credit card, further adding to the health of her business. Amanda and her staff can now focus on what they are good at: making their guests feel at home.

And Amanda and her staff will live happily ever after… The end.

Ask yourself… Where will you find the courage to make profound things happen in your business?

Business Plans that work

A business without a Business Plan

achieves everything in it!

Yet, why do they have so little impact?

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

A truer word has n’er been spoken, yet does that mean that a business with a “Plan” will by default be successful?

All cows eat grass. This animal eats grass…

ergo it must be a cow!

No, obviously not. Most business plans don’t have much of an impact on the success of the business because nobody in the business feels the “Plan” has anything to do with “what gets them out of bed in the morning”. It is just one of those things that you “ought” to have, all the books say so!

You probably have a “Plan”. It might be based on a “Business Plan Template” you found. You filled in the blanks and fiddled with it a bit. It makes the bank happy. It looks great, it feels good in your hands, and when you finished it, you felt that warm and fuzzy feeling we often mistake for business achievement in the absence of more solid evidence. But when was the last time you even looked at the thing?

First things first

Let’s start at the beginning: Why is it again that we even need a “Business Plan”?

The purpose of creating and having a business plan is twofold:

  • To spell out exactly where the business is headed and how it will get there.
  • To have a fixed set of criteria to “test” every decision in the business against.

If your Business Plan meets both of those criteria, wholly, 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

So how do you create a “Plan” that will be so alive?

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, today.
  2. It must have been created by the people directly affected by it, at the time of its creation.
  3. It must be created in ways and in terms that are meaningful to the people who have created it and who maintain it.
  4. It must be based on the “Guiding Principles” of the business.
  5. The “Guiding Principles” in turn must flow from the “Mission” or “Purpose” of the business.
  6. Finally the “Purpose” of the business must be a clear expression of the “Values” and “Aims” of the people who ARE the business.

As you can see, this means that before you even start to think about putting a “Business Plan” together, you need to focus inwardly, individually or as a team. You need to get very clear about what “gets you out of bed in the morning”, what the purpose of being in business is at all and how you decide what to occupy yourself with in this business.

Personal Values

A good way to start this process is to do an exercise to determine what your top personal values are. There are a lot of tools available to help you with that process. One of them, a personal values checklist is available on this site on the downloads page. Once you are really clear about your personal values, the values that you want your life to be about, right now, it is time to think about the “Purpose” of your business, and how that purpose or mission connects with your personal values.

Research all over the world clearly shows that a business “Purpose”, “Mission” or “Vision” that is solidly grounded on your own personal values is an absolute indicator of the success of your business. So: WHAT are you in Business for? What is THAT all about? It may be about money, but often it is about so much more than money: What will you get from having a successful business? What will that give you? How will you know that your business is successful, and what difference will that make to you? Or your family? Or your customers?

Guiding Principles

Then it is time for step 3. This is where the actual creation of a purposeful and impactful Business Plan starts. The “Guiding Principles” of your business are the principles that every decision and every action in the business is guided by. It will be the litmus test for everything you do.

If a decision you, or someone else in your business, wants to make conflicts with the “Guiding Principles” there are only two options:

  1. Don’t make the decision
  2. Amend the Guiding Principles

There is no alternative. Putting a set of Guiding principles in place will be one of the most powerful things you will ever do for your business, and once you have them in place they will form page 1 of your Business Plan.

Here are some random samples of “Guiding Principles” I helped clients design in the last year:

  • Our behaviours are: Open, Trusting, Professional and Safe
  • All our processes add value
  • We leave the environment better than we found it
  • We deliver more than expected
  • We deliver when we say we do.
  • Shareholder value is increased every year
  • All our employees will have a stake in the business
  • There is life outside the business for our people
  • We own our competitive advantages
  • We are a positive force in the communities we are a part of.

In future articles I will write about the next steps in the process to create Business Plans that make a difference.

Further reading:
  • “It is not the Big that eat the Small, it is the Fast that eat the Slow” by Jason Jennings and Laurence Haughton
  • “The E-Myth revisited” and “E-Myth mastery” by Michael Gerber
  • “The one-minute-manager series” By Ken Blanchard et al.
  • “First Break all the rules “ by Marcus Buckingham and Curt Coffman
  • “The Fish series” by Stephen C Lundin et al
  • “Maverick, the success story behind the worlds most unusual workplace” By Ricardo Semmler

Profits are a liability

Profits are a liability

 

What do you want for your birthday?

My birthday is this month and what I want is my business to grow 50% this year. Would you like one of those too?

Ok that can be organised, but what about next year?

Ah, yes, of course we actually want our businesses to continue to grow next year and the year after…

If your business is growing by more than a modest inflation-like rate or thereabouts, there are 5 key “factors” you MUST continually address:

  1. Your market focus
  2. Financial foresight and plans
  3. Your management plan and organisational structure
  4. Understanding of your own responsibilities and what you bring to the business
  5. Outside advice and support

This article is the first in a series of articles about sustainably growing a business and I want to tackle point (2), financial foresight, first.

Readies

The one factor that stifles and destroys growing businesses more than any other, is money, cash to be exact, “readies”, money you have available day to day. To be more precise… the lack of it.

There are millions of stories around the world of businesses that experienced fabulous growth, that were the darlings of the investment community. Companies that had “The Next Big Thing”, with profit levels to make every other business owner green with envy, issuing staggering forecasts…..and failed. Small and large, businesses just like yours.

If your business is going to grow, heed this warning and heed it well: If you do not plan for cash, you will not have it when you need it. Even if you somehow survive that crisis, it will cost you an arm and a leg, not to mention years of your life!

A business cannot grow unless you feed and water it with money. When you grow a pot plant, it will outgrow its pot when the plant increases in size by 25%. A business is just like that: As the business grows 25% or more, it will need a different pot of money to feed in. The ferociously growing business will soon dry up your own resources and those of your partner, and your parents etc. What you might have been able to finance through your own funds, a personally guaranteed overdraft, credit cards, and cheap money like 30-day trade accounts with suppliers, is suddenly ravenous for more.

Rule of Thumb

A “Rule of Thumb” used by jaded bankers and accountants when assessing the financial needs of a growth business is: Assume that receivables, (what you are owed) will take twice as long to collect as expected and payables, (what you owe) will need to be paid in half the time you expect.

It can be extremely tempting to look at a Profit and Loss (P&L) print from your bookkeeping programme and be lulled into a sense of security because you are showing a healthy turnover and great profit levels, talk about an aphrodisiac! But profit means very little, it is purely a number on a piece of paper, and bears virtually no relationship to your bank account or your ability to pay people and the sustainability of your business.

Bad News

In fact, net profit in your company is a liability! Let me repeat that in case you did not get it: Profit in a growing business is BAD NEWS!

Come again? How can that be? Well that is very simple: Net profit means you have to pay tax, and that means taking money out of the business and sending it to the ATO. Don’t get me wrong I am all for a healthy tax system, I like the fact that I was able to spend a week camping in a National Park over Christmas, all paid for by the tax system. However, it is your job to build a sound and healthy business, one that will pay its taxes for many years to come, not just this year. Making profits in the growth phase of a business simply means you will be drawing money out of the business that you will have to replace from somewhere else.

Musts

So, what are the recipes for financial success when leading a growing business?

At a high level, there are three “MUSTS” involved:

Delegating the bookkeeping to others, DOES NOT absolve you from the responsibility to keep control of the outcome. You simply MUST keep your finger on the pulse PRO-ACTIVELY! You are accountable for the health of the business, no one else.

You MUST put an effective financial control system in place, and monitor it.

You MUST put a cash flow forecasting system in place, and monitor it.

Let me give you the critical steps for the implementation of (1) and (2) above first:

Get the best bookkeeping system that is available, keeping in mind that the system has to be plenty big enough to cope if your business doubles triples or even quadruples in size.

Make sure that you have at least one person (with a backup) onboard, (if that isn’t you) in-house or external who knows the system inside out. They must be able to produce the answer to any question you might like to ask of the financial control system of the business.

Spend the time to become very very (that is VERY) clear what you need to know on a daily, weekly, monthly and quarterly basis. What are the critical indicators of the financial health of the business? If you do not know talk to your accountant, and make sure you understand what he or she tells you.

Write down what those critical indicators are, in unmistakable language, in a schedule.

If you have delegated the bookkeeping to others (note the word “delegate” not “abdicate”) communicate this schedule to them, make sure they understand the requirements, keep a copy of the schedule yourself, confirm that they are happy to meet ALL the requirements of the schedule and ask what they need from you or others to be able to meet them. (See also my article on effective delegating in the archive on my website)

As a matter of absolute priority, put time aside daily, weekly and monthly to ensure that you get everything you agreed with the bookkeeper. Peruse, understand and act upon the reports and information. Do not get slack with this, ask someone to push you on it if you need the extra kick up the backside, make it easy for yourself, but do it!

Cash flow, the Leaders job

The previous two points all lead up to this one. As I have said above, cash flow is the killer.

To be able to do useful cash forecasting, you cannot rely on your bookkeeping system alone, at least none of the ones I know. It requires the use of your brain, primed with the information, reports and other data you get from points (1) and (2) above. This is the work that the leader is called upon to do, that is YOU!

Cash flow forecasting is a bit of an art and by its nature can be somewhat rubbery, and that is exactly why many businesses put it in the “too hard” basket. By doing it regularly it will become more accurate, easier and take little time.

The essential principle is simple. It requires a spreadsheet to set it up. You can buy spreadsheet templates that will do the job for you and that is a reasonable option. Of course, you can also get help; your bookkeeper, your accountant or your business coach will all be able to help, assuming they know their trade.

The basic recipe is this:
  1. Take the bank balance on day 1 of month 1
  2. Deduct regular expenses for the month
  3. Deduct what you know you will have to pay during the month
  4. Deduct what you reasonably expect you will have to pay during the month
  5. Add what you know you will be paid during the month
  6. Add what you realistically expect (not “hope”) to be paid during the month
  7. Calculate the bank balance by the end of the month.
Next month:
Add closing balance of month 1, as opening balance of month 2

Repeat the process above

And so forth for every month of the year

For some businesses, it may be necessary to do this forecast on a week-by-week basis, but for most businesses monthly will give you what you need.

Simple really and of course as you get further into the future there will be a fair bit of guesswork involved but even allowing for that I promise you that you will get a nasty shock.

But wouldn’t you rather have the shock now? 6 months out from the looming crisis it will be quite feasible to do something about it, but one month or even a week out, the best case scenario is that it will be a very expensive experience, and the worst case scenario ……….

Further Reading:

For more information about to how to step out of overwhelm, get unstuck and start having Fun in Business again, click here

Books:
  • “The E-Myth revisited”, By Michael Gerber
  • “E-Myth Mastery”, By Michael Gerber
  • “The E-Myth manager”, By Michael Gerber
  • “The Essential Drucker”, By Peter F Drucker
  • “Classic Drucker”, By Peter F Drucker