I spend a lot of time looking at the financial situation of the businesses I work with, and this seems to be a growing area of my work. Which is good because I like the numbers, and they make sense to me.
Many business owners are either too busy looking after customers or selling stuff, or the hundred and one other things that the business person has to take care of. Lots of the businesses I go and see rely on their accountant to look after the money side of things. When I ask how much profit they made last month (or last year) people tell me,
“The accountant hasn’t finished the books yet” or
“I’m not sure…” and then they tell me how much they sold, rather than how much profit they made.
Why this worries me
What I’m saying here is that most (not all) business owners are not confident with the money side of their business, and that means that they’re not in control of their company.
Which worries me.
It worries me because when you look at the statistics about business failure, lack of financial control is the number one cause of business death. It’s like heart disease and cancer rolled into one.
If you don’t understand the financials you need to learn how to do this, because otherwise you are putting your business in danger. If you rely on your accountant to do everything for you, it’s the same as smoking and eating chips every day, and then relying on your doctor to cure you. Can’t be done.
What is your accountant's job?
People believe that their accountant’s job is to look after the financial side of the business. But this isn’t true, any more than it’s your doctor’s job to keep you healthy. Your accountant is there to keep a record of what happens financially in your business, and to give you advice about how you can arrange your financial affairs to keep more of the money for you and less for the taxman.
So let’s think about that for a moment. Notice that I said “keep a record”? Now by definition, records are historical. Your accountant is looking at what has happened in the past with your business. If you’re lucky with your accountant she’ll be able to give you advice for the future based on this historical record. If you’re unlucky (and I’d say this is true for around 80% of businesses) you’ll get a sheet of paper which is about 6 months out of date, which will mean very little to you, and you’ll file away, thankful that you don’t have to deal with those scary tax people.
What you need to know
Your accounts tell you what has happened to your business financially. But you want to know what is going to happen in the future. One of the main advantages of running a smaller business is that you can react very quickly to what’s happening in the market. If people suddenly start buying everything in orange – you can start selling orange things. But if you don’t know that people are buying the orange things this month, you can’t do a marketing campaign to tell the world that you’re the best person to buy orange things from.
You need up to date financial information to be able to make the right decisions about how to develop your business. You need to know:
- How much money am I making right now
- Where am I losing money
- What do I need to prioritise
And above all you need to know how much money is in the bank, and if you can pay the bills next month.
A story about taking control
I recently did some work for one of my clients where I looked in detail at their finances. I worked with their bookkeepers, and changed the way that their management accounts were presented. For the first time, the owner of the business could see clearly where they were making money. As a result of this, she dropped two services because they were taking up time and not making any profit.
Then I did a cashflow forecast and we were able to see that unless sales went up, the company would run out of money in February, because although the company was profitable, there wasn’t enough money in the bank to pay the tax bill. If we hadn’t done this, there would have been some sleepless nights in February, and given the current situation where banks are much less likely to lend money for emergencies it could have been the end of the road for my client.
Instead of going bust, we set some targets for selling more of the most profitable services. And what’s really weird, is that 3 months later, sales are up in exactly those areas – by more than the targets.
Where you need help
If any of this sounds like you, please do get in touch and talk about your finances. I can help you to understand your accounts, talk to your accountant and bookkeeper because I won’t be blinded by jargon, and help you to work out what you need to do to plan the future.
That will help you to concentrate on the things that you’re actually good at, and to sleep soundly at night.
Julia Chanteray
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