Updated: Mar 7, 2022
After 25 years in the finance and accounting game and consulting with hundreds of business owners it is clear to me that business success lies in its financial foundations, ie the business needs to be able to turn sales/income into profit to enable repayment of debts, remuneration to business owners and to allow growth. Sound simple? It’s not!
Most business owners go into business as they are passionate about their product or service, they see a need to be met or they have developed a skillset. They don’t often know how to run a business from a financial perspective and make the leap to business owner thinking the finances will look after themselves. I can assure you from my experience this is not the case.
Instead of working on their financial foundations they rush into getting as many sales through the door as they can. Although this is critical there is a key element missing and that is the sale needs to be turned into a profit and cash.
If you don’t have the right financial foundations this will not occur, and you will end up running what I consider a ‘business charity’ where you have losses or employees are receiving a higher rate of return for their work than the business owner. As the business owner you have taken on all the risk and invested your intellectual property so you should be rewarded for this effort.
An analogy may help here, when I was growing up my Mum was the dinner police and ensured we finished all our main course before we could enjoy dessert. Why were we forced to eat our main course? because that is where the nutrition was held and fuelled us up for the days and weeks ahead. The dessert was the fun stuff, it tasted and looked good but too much of it and we would become unhealthy.
If I apply this concept to business, the main course of financial foundations is what the business should eat first to remain full and healthy, it holds the nutrition and fuels the business to move forward profitably. I know the main course might not look like the most appetising option at the time, but it is however the healthiest one. Once the business has had its main course it can then eat dessert.
So, let’s delver deeper into what the main course for business is?
1. profit and loss – ensure income can be converted to profit
2. balance sheet – ensure assets are greater than liabilities and there is healthy equity
3. cash flow statement – ensure there is more cash coming in than leaving
There are many levers you can pull in your business to obtain these outcomes. Ensuring you eat all your main course will make for a fit and financially viable business that can then eat dessert, such as marketing, social media, branding, basically the sweet stuff, as it will be returning a profit and cash and you will get the return on money invested in these activities.
Just remember that it is not the businesses that have the biggest sales that are the most successful, it is those that can convert the sale to profit and cash.
Think of your accountant as your business nutritionist – we can help you find the right main courses for your business and recommend the right portion size, so your business is healthy and profitable and has the fuel to ensure longevity and growth. Then you can go to town and enjoy your dessert.