6 Key Financial Areas you MUST UNDERSTAND as a Business Owner
By Ron Brockwell
"What is the most common mistake business owners make when they are starting or growing their business?"
While I could say it is setting goals, planning their time or doing enough sales and marketing, the key factor must be the lack of financial understanding.
Businesses go bust because they run out of money. Even the most poorly run business will survive if it has a constant supply of cash. I have come across businesses run by people who have never taken a penny out of it for themselves - relying instead on investments, family or, worse still - borrowing to fund their personal life. The worrying thing is that they have no idea of their financial status so they continue doing the same old thing.
Even good businesses that make profits can fall prey to Cashflow problems when they start to over trade. Overtrading is where the sales of a company are increasing but the money from the sales comes in slower than the money goes out to pay the suppliers (often called the cash gap). When the money runs out the business cannot continue even though it has sufficient sales revenue.
Not all factors are a result of the business itself. We are currently in a time when our customers are finding it tough and if they are unable to continue they may well leave us with an unpaid (bad) debt that can have a serious impact on our own business.
The final factor is that the business model does not actually work. The overheads are too high, the profit margin on each product / service is not enough, the systems are inefficient and teams are underperforming.
So how can we reduce the risk of our business failing because of these factors? Well the simple truth is that we need to know our numbers! Take the sporting analogy - any sport will do - let's take golf as an example. If you do not know how to score how can you play the game? If you think it is a race, then you would be timing yourself, if you thought it was 2 points for a drive on the fairway and 10 for knocking it in the hole then you would not be able to compare yourself to everybody else who might be scoring it differently. Also can you imagine how dull a sport would be if you did not keep score? How would you know if you were improving or identify your weaknesses or compare yourself to the competition, or even know if you had actually won anything?
Keith Cunningham, the author of “Keys to the Vault,” says: “If you do not understand your financials, you should not be in the game of business.” I am not saying you need to be a financial wizard, but you must know the basics and be able to ask the important questions that will affect the course of your business. If you have a real problem with numbers then employ someone you can trust to help you. Not understanding the rules is no excuse when you are playing the game.
There are 6 key items you need to understand and look at on a regular basis - at least monthly. (For some businesses, this could be more often such as weekly or even daily.)
1. Profit & Loss account – Key to monitoring your sales, costs, and profit margins for the period.
2. Balance Sheet – A snap shot of the business showing where the money invested in the business is at any point in time.
3. Cashflow Forecast – A week-by-week projection of the flow of cash in and out of the business.
4. Aged Debtors & Creditors – How much you are owed and owe and how many days they are outstanding.
5. Budget – Prepared once a year and reviewed monthly, to ensure that costs are kept in check and sales are meeting targets.
6. Key Performance Indicators (KPIs) – KPI’s that are specific to your business are the pulse that tell you how fit you are. They can cover any aspect of the business from the number of leads coming in, the rate of converting leads into customers, right through to waste and down time.
When you first start learning about your financials, it can be hard and confusing, but it is no different than learning a new language. You can put in the effort, read about it, take lessons, exams, etc. Or you can dive right in, speak to people who talk the language, use what you learn daily and pick it up that way. But remember the old adage still applies, “the more you learn the more you earn.” There should be no embarrassment going to ask for help to understand your financials - after all if you did not know the rules of golf, you would have no problem asking somebody for help learning them. The only embarrassment is if your business fails because you misread your score.
Time is Money – Invest it Wisely
By Ron Brockwell
Time is a limited resource for most business owners, so it must be "managed" if you want to achieve your goals within the timeframe you set. Time management (or SELF-management) is all about setting priorities and sticking with them.
When it comes to managing your time (or self) consider this: There is a big difference between activity- tasks that keep us "busy," and productivity tasks that take us closer to our goals. Most business owners are busy, but are they busy doing the right things? Self-management requires discipline (no doubt about that). And at the end of the day, you need to find what works best for you. Here are some tips to improve your productivity:
Know How You Spend Your Time. Begin to track your tasks for a two-week period and be specific. Then build a list of tasks and people that wasted your time (or money) each day. Make a special note of the interruptions. Most people find this eye opening. Once you recognize the time and people wasters, you can take actions to fix the problems.
Get Organized. It is easier to perform tasks when everything is where you need it and out of the way. This means clearing off your desk so you have room to work and eliminate distractions. Everything should be in a file or binder (in a drawer, cabinet or bookshelf). If you need help organizing your space, check out "Organizing for Dummies" or get help (there are people who do this).
Create a "To Do List" and Use It. When you identify a task that needs to be completed, put it on the list and give it a priority (low, medium high). When you plan your weekly work, pull tasks from the list and always do the high priority tasks first. Don't forget to continuously evaluate the priority levels you have assigned; time can change some of these.
Plan Your Work. At the end of the week, plan your next week AND at the end of each day, plan the next day. According to Brian Tracy, every minute spent in planning saves as many as 10 minutes in execution. In other words, 10-12 minutes planning can save you two hours in wasted time and effort throughout the day. What would you do with an extra two hours per day?
Block 0ff Time to Work on Tasks. The tasks on your "To Do List" will remain there unless you block off time to work on them. When planning your week, block off chunks of time and assign tasks to them. Don't work on anything not on your list and don't try to accomplish everything in one week.
Break Down Big Tasks. Big tasks can appear overwhelming (so they quickly get put aside). Break them into smaller chunks that are more manageable. Then schedule time to work on them.
Delegate or Outsource. Always look for opportunities to delegate or outsource recurring tasks or low-value activities. Did you know that 50 percent of time wasted in business is due to lack of trust? This is because the owner doesn't think others can do it as well or micro-manages the team. Give your team the tools and processes; then watch them shine (and see how much time you gain for more valuable activities).
Use a Tickler File or Follow Up System. Lose the out of sight; out of mind mentality that drives many business owners to keep files visible. Rely on a tickler or reminder system to insure important deadlines are met.
Don't Procrastinate. Work on the tasks you dislike (or those that are more complex) first. Then, they won't be hanging over your head or causing your mind to wander. Plus, you'll feel great when you check tasks off the "To Do List."
Hold Calls (Or Send to Voicemail). If you block time to work on important tasks hold that time sacred and don't permit interruptions except from a handful of VIP's. Block off time to return calls each day at your convenience. You may also find that when you are not so accessible, others will handle the "issues" and some problems will actually resolve themselves.
Handle Mail (or Email) Once. When you go through the mail apply the following formula: Delegate, Action (add to 'To Do List'), File or Trash. Do not put aside to handle later or you simply end up with multiple piles of unaccomplished tasks.
Strive For Excellence, Not Perfection. Results come from taking action. By striving for perfection, you delay taking action or delegating tasks to others.
Learn to say NO. Those two letters are the best time-management tools there are. A wise man once said, "When you spend your money, you can earn more. But, when you spend your time, it's gone forever."
Time is your most valuable asset. Invest it wisely!
7 Marketing Strategies to Distinguish Yourself from the Competition
By Ron Brockwell
In a market rife with screaming messages, prospective customers/clients usually tend to turn off most of the noise and look for only a unique message. In such an environment, where prospective/customers are becoming increasingly selective, a small-to-medium sized business can reach its target market by using several basic strategies.
Here are seven such marketing strategies:
Re-examine the core message frequently: It is critical to re-examine the core message frequently with a fresh pair of eyes and ears. Give it some thought and update as well as refresh the messaging periodically to generate renewed interest from clients/customers.
Test and Measure: with existing clients/customers and ask them to explain it back in their own words to measure if they comprehend the core message.
Focus the message on benefits rather than features: Sometimes, there is too much focus on the features and functions of the product. A prospective client/customer is interested in finding out what's in it for him, so it is crucial to minimize distractions and outline the message around benefits and solutions.
Focus on the most useful marketing materials: Avoid using all your marketing material - focus, instead, on those materials that are most frequently requested by prospective clients/customers and optimize their messaging.
Measure the effectiveness of these marketing materials: Use feedback and survey forms to measure the effectiveness of marketing materials from prospective clients/customers who have been in contact with these materials.
Achieve "top-of-the mind" presence through email campaigns: Create an email campaign that helps you to continually and passively stay in touch with your prospects and clients/customers, in a way that it provides value to them - a monthly newsletter with valuable information for the prospects is a great example of such a campaign.
Create and implement a customer communications calendar: This will help schedule continual contacts that ensure the company's prospects are receiving its message often enough and that the company is in their thoughts when they decide to purchase.
Big Lessons Small Businesses can learn from Big Businesses
By Ron Brockwell
As a Business Coach I observe trends and practices of business. Recently I met with a new banker client for coffee to learn more about her bank and what I could do for them. While I was there we got into a few conversations that made me really think about big companies, profit, and customers.
Below is what I observed:
I met the banker at Local Coffee. I personally prefer Starbucks versus Local Coffee but she picked the meeting location. With that being said I asked her if she was a Local coffee type gal. She told me that she used to be a Starbucks gal until they started burning their coffee and now she is a Local coffee gal. I thought to myself, "she must be a coffee snob." It seemed odd for someone to accuse the biggest and most successful coffee shop of not having the art of brewing coffee down. I was about to shrug it off until a bearded man sitting close to us eves dropped in and said, "That's funny, that's why I'm here. Starbucks started burning their coffee and now I drink Local Coffee too." At this point I started to find it odd and about to brush it off and get back to the task at hand until another couple chimed in saying, "Starbucks actually decided to start burning their coffee because they get three more cups out of every pound." The woman next to the guy said, "My friend is a District Manager with Starbucks, she said that they actually decided to start doing this to increase their profits." So now I was really intrigued and started to analyze. I realized quickly that Starbucks very likely has started burning their coffee to make more profits. And the end result: four out of the five people I was surrounded by were recently converted Starbucks-to-Local Coffee customers. Now this sounds like a brilliant way to save some money! If you want to save money, just get rid of all your customers. Your savings will be enormous and you won't have to deal with as many customers. They are being very kind to give their customer base to their competitors. (Being sarcastic)
Later in our conversation, my new banker friend told me that she's been with Sprint for her cell phone service for ten years. For her ten-year anniversary they sent her a coupon to choose from either a couple of their phones, which seemed like the free phone list, or a five-dollar coupon off her next bill. Can you believe after ten years the way to say, “Thank you, we appreciate your loyalty to our service" is by a five-dollar coupon or a cheap phone. Both of my brother’s also have Sprint and I thought to myself, "I don't want them to reach that ten year anniversary point with them." So I asked her what her average bill ran with Sprint. She said her average monthly bill was between $150-200. That means she spends about $2,000 per year for 10 years, a total of around $20,000, and they offer her FIVE BUCKS off her next bill!
Both conversations really made me think. Do big companies not think of the long-term effects of their "brilliant schemes?" History shows that when companies lose focus of putting their customers' needs as high priorities their futures typically are not overly bright. Sometimes decisions have to be made that are not short-term, quick fixes that might not be the most profitable decisions, but will help retain good customers, and therefore will be there for the long-term benefit of the company.
Our conversations eventually transitioned to how small businesses are typically so much better at treating customers as people and how small businesses have a huge advantage in this regard that they should really strive for. It is one advantage that they need to have to compete with these big companies. Small businesses every day have the opportunity to connect with their customers on a much more personal level, whereas most big businesses look at individual customers as numbers and a dollar. In small business they don't have the luxury of treating customers like numbers and as a customer I don't like being thought of as a number. A company that has kept with the small business mindset in respecting their customer is Zappos.com. Zappos.com is a billion dollar per Year Company that does a great job of treating customers like people.
So, what's the #1 reason that customers will leave a company as a customer? Perceived indifference! That is, the perception that the company just doesn't care about them. Another way of putting it is that the company cares more about selling three more cups of coffee per pound; or that they care five dollars worth for your last $20,000 in business. Now THAT'S indifference. And it's not just perceived. Get out there and show your customers that you care about them and that you honestly appreciate their business! And watch your profitability be impacted for the better by keeping customers longer and by them referring many more people to you.
Creative Leaders versus Reactive Leaders
By Ron Brockwell
Great leaders, some experts say, are creative rather than reactive. In other words, they anticipate future demands & trends and make new products or tailor the ones they already have to suit that future. For many reasons things are changing very rapidly, these days. That's why it's more important than ever to be able to understand how those changes will affect your business and establish ways to take full advantage of those changes. Are you creative or reactive? Here's how you can test your potential. Test Yourself: Are You a Creative or a Reactive Leader? If you want to advance quickly in the business you work for or accelerate the progress of the business you own, you've got to become much better at starting things, and at making things new or making new things. In an article in Fast Company magazine ("The Secret Life of the CEO"), Jim Collins (author of "Good to Great") wrote that the best leaders don't focus as much on beating the competition as they do on making their own products and services better than they were before.
Creative business leaders are always asking themselves the following questions:
• What do potential customers really need, now?
• What worries them?
• What causes them pain?
• What would they be eager to buy? • How can I make our current customers happier?
• How can we make the products we sell them better?
• More useful?
• More valuable?
Do you ask yourself these questions? Regularly? And if you do, do you come up with good answers or great answers, answers that can advance your business? Test your creative skills against the following checklist printed in an issue of Executive Leadership.
Ask yourself…are you:
• Internally driven
• Focused on the work, not politics
• Goal-oriented, rather than crisis-centered management
• Great relationship builder
Ask yourself…do you:
• Make full use of your strongest talents
• Set aggressive long-term goals
The above are all characteristics of creative leaders. Here are the traits of "reactive" leaders. They generally:
• Are motivated by external factors like money and power
• Are focused on corporate politics, not the work
• Allow their time to be dictated by what's in their inbox
• Sometimes they ignore their strongest talents in favor of "Good Management"
• Plan in one-to-five-year increments
• Believe nothing is sacred and relationships are expendable
How many of those reactive characteristics apply to you? How would you grade yourself? Great Leaders are indeed long-term oriented, people-friendly, loyal, eager to provide better products & services, and unconcerned about where they stand in any pecking order…either in their industry or within their business.
Profit and Profit Margin
By Ron Brockwell
Do You Understand Your Profit Margins? When was the last time you really examined your margins? This area of the 5 Ways is the easiest and quickest to improve if you scrutinize it and take action. First, let’s clarify some key terms that are often confused. Margin is NOT the same thing as markup. Markup is a “worn-out” approach to pricing which gives you a false picture. The reason for this is that markup is based on cost and margin is based on sales. The main reason we should use markup in our discussions and comparisons is that the important aspects of the business use it.
For example, your financial statements (according to generally accepted accounting principles) are expressed using margins. Your tax returns are expressed using margins. If you have “markup” in your head and “margins” on the vital documents of your business, it’s no wonder you are confused when, after, the fact, you try to “reconcile” the realities you’ve experienced with the reports you see.
The two most common margins to look at are Gross and Net. Gross Margin is the result of subtracting cost of goods sold (COGS) from sales. This is expressed in dollars and percentage. For example, if you have sales of $50,000 and COGS of $30,000, this results in a Gross Margin of $20,000 and 40% (GP dollars divided by sales).
It is from the Gross Margin that all remaining operating costs are paid (rent, salaries, insurance, taxes, etc.). What’s left over after all expenses are paid is Net Margin, which is also expressed in dollars and percentage. It is important to look at both margins and the “spread” between them as changes in pricing, business practices, repairs, etc. will impact one or both. It is also a great idea to periodically review individual jobs and campaigns for their respective gross and net margins. Doing so will help you pinpoint changes that need to be made. You don’t always want to wait until the end of the month to see how well you did; periodic review prevents unpleasant surprises.
Once you know your margins, you can begin to look at ways to improve them. On the “gross” side, look at deals that are available on frequently sold items. Sometimes, taking advantage of a special purchase or buying in a different bracket will boost gross margin instantly by lowering your product costs. Explore different suppliers, too. Maintain great relationships with your current ones, but always have a “back-up”.
When was the last time you raised prices? A price increase may be necessary and instantly improves margin. Here’s another benefit, which is not often noticed: if product costs are increasing and you maintain the same gross margin, you increase the amount of “dollars” generated (and deposited into your bank account). In this regard, a little inflation is a good thing!
With regard to net margin, improvements in operating expenses drop right to the bottom line, increasing the net. Examine phone bills (and associated plans), office supplies (often a huge opportunity), fuel costs (routing and trip scheduling), insurance coverage’s (talk to you agent about limits and exposures), and marketing. Remember to test and measure your marketing; track it weekly, total it monthly, and evaluate it quarterly (before you make your next 90-day plan).
When considering marketing investment, a “mature” business can be in the 2% range, a new business might be near 10%, and most can fall into a 3-5% (of sales) range. If you stop spending money on things that aren’t working, the savings increase your net margin. Knowing, measuring, tracking and evaluating your margins are vital to success and growth. Make sure you are “on top” of yours.
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