Having worked with thousands of small and medium enterprises over the last 21 years, I’ve had the opportunity to observe and study highly successful businesses and what they do from a financial perspective.
Sadly, I’ve also had the opportunity to observe what struggling businesses do, or more to the point, what they don’t do. The impact on the owners, the team members, the customers, the suppliers and their respective loved ones is huge. These are businesses that have great fundamentals but do not understand how finances work. The pain it causes is as undeniable as it is unnecessary.
What are the common threads then of highly successful businesses from a financial perspective? In my view, there are 3 must-haves – systems, monitoring and strategy. Let’s explore each one in a little more detail.
Systems, including accounting systems are the skeletal structure of your business. Without them your business will be a floppy, mushy, unstructured, blubbery mess. Now I know you’d rather be in front of a mirror plucking nose hairs than reading about accounting systems, but I urge you to read on. This can be the difference between your business’s success and failure, or the difference between cash flow stress and cash flow freedom. You choose!
Here’s the thing: If you do not have a process for continuously improving your accounting systems then I guarantee you are flushing cash down the toilet. That is a 100% guarantee. Accounting systems never have been and never will be perfect. The evidence behind this is the fact we have an audit profession. The audit profession raises in excess of $270 billion dollars each year around the world. That’s how big the industry is.
We know from our research very few small and medium enterprises develop their accounting systems beyond being able to do some basic administrative tasks and meet your taxation and legal obligations. There is no focus on reducing risk attached to the business and the outcomes are predictable. Also, without developed accounting systems you will not have the ability to effectively monitor your business’s performance, the next common thread in highly successful businesses.
Is your business on track or off track? Are your strategies effective or ineffective? Do you know how profitable your business is from month to month? How well are you managing your costs and production efficiencies? Do you know where your profit has gone? Is your funding strategy working? How is the overall financial position of your business tracking?
If you are not effectively monitoring your business then you are winging it. Research tells us up to 77% of you fall into the winging it category. I believe this is a large contributor to the high failure rate of small and medium enterprises.
Imagine watching a game of test cricket where the score was not recorded. You’d have no idea of how the game is progressing, let alone the outcome of the game. Would you watch a game of test cricket where there is no scoring?
The most common tool that is used to monitor your business comes in the form of Management Information. Your Management Information is wholly dependent on your business’s ability to capture meaningful data. The way to capture meaningful data is by using your developed accounting and operational systems. In my view, the quality of your Management Information is a direct reflection on the quality of your systems (accounting and operational).
The next common thread is strategy. Without monitoring, you cannot set strategy. How can you set strategy when you don’t know the current state of play of your business?
In a financial context, financial strategy is required over different time periods; short, medium and long term. Financial strategy is a topic on its own; we could spend hours and even days discussing it. The information in this article really is the tip of the iceberg. In short it’s all about cash flow, building a business model that is consistently and constantly cash flow positive. Is that of interest to you?
Developing short term financial strategies requires knowing the current state of play of your business so that new strategies can be identified, formulated and executed. For example, if you discover the number of days to collect your accounts receivable is beyond what you ideally allow, then strategies can put in place to reduce the days. These are your day to day real time strategies required to keep your ship on course, to allow for the head winds, the side currents, and the inclement weather and so on.
Medium term financial strategies are centred around each financial year and planning. What the overall plan of attack is in terms your business’s capacity, revenue strategies, production efficiency, cost structure, funding and overall financial position? Long term financial strategies are focused on designing a business that is sustainable, profitable, cash flow positive and contributes to your wealth through increased value of your business.
In a nut shell, strategy is used to financially design a business that supports you in achieving your financial freedom. Over the coming months we will explore each of these common threads in more detail for your success into the future.
By Greg Smargiassi