We Asked Bruce About The Money Frustration From Back In The Deli Day's...

"For twenty three businesses I had avoided the Financials. Why? I thought that was the role of my accountant. Isn’t that what he is trained to do? This resulted in me seeing my accountant once or twice a year where he would talk to me in terms such as ‘profit and loss’, ‘cash gaps’, ‘cash flow’, ‘break-even’, ‘balance sheets’ and the like that I had little or no understanding of.

Given my rather inflated ego, I just nodded as if I understood what he was saying and headed back to make more coffees and slice more meats.... the stuff I was good at.

Ignoring the financials in a business is a dangerous game to play. Fortunately up until now I’d survived. It wasn’t until I was talking with a local business owner and he asked me, “What would happen if you went broke?” I’d never really given it any thought but now the question had been asked it got me thinking and I quickly realised I would lose everything, the business, the house, investments, even the car - and what sort of pressure would that put on the relationship and family. The other thing that struck me was if I went broke I stood to loose everything, what would my accountant lose? ONE CLIENT!

It was at this point I decided that I needed to become financially literate. I’d been avoiding it long enough. In the meantime I’d recruit a book keeper to come in and get my accounts, payroll and suppliers in order whilst I hit the books to gain the knowledge.

What a relief that was. There is one simple reason why you MUST understand and observe the financials in your business i.e. to avoid failure. Eight out of ten new businesses fail primarily because of the lack of good financial planning.

Financial planning affects how, and on what terms, you will be able to attract the funding required to establish, maintain, and expand your business. It affects the human and physical resources you will be able to acquire to operate your business. It will be a major determinant of whether or not you will be able to make your hard work profitable.

Creating a clearly conceived, well documented financial plan; establishing goals and including the use of budgets to ensure financial control, will demonstrate not only that you know what you want to do, but that you know how to accomplish it. I found by doing this, it was easier to attract the capital to expand the business from creditors and investors.

So What Is Financial Management?

In simple terms, financial management is the use of financial statements that reflect the financial condition of a business to identify its relative strengths and weaknesses. It enables you to plan, using projections, future financial performance for capital, asset, and personnel requirements to maximise the return on your investment.

Some of the tools I had to learn and implement;

• Basic Financial Statements - the Balance Sheet and Profit & Loss.
• The Pro Forma Profit & Loss (Budgets) - a method used to forecast my future profitability.
• Break-Even Analysis - a method allowing me to calculate the sales level at which the business recovers all its costs or expenses.
• The Cash Flow Statement - identifies the flow of cash ‘into’ and ‘out of’ the business.
• Pricing formulas and policies - used to calculate profitable selling prices for products and services.
• Types and sources of capital available to finance business operations.
• Short and long-term planning considerations necessary to maximise profits.

By understanding these concepts and using them effectively, I increased the likelihood of success within the business.

The two primary financial statements where I started were, the ‘Balance Sheet’ and the ‘Profit & Loss’.

The Balance Sheet provides a picture of the financial health of the business at a given time, usually at the close of an accounting period. It lists in detail, material and intangible items the business owns (known as its assets) and what money the business owes, either to its creditors (liabilities) or to its owners (shareholders’ equity or net worth of the business).

Assets include not only cash, but also merchandise inventory, land, buildings, equipment, machinery, furniture, patents, trademarks, and the like, but also money due from individuals or other businesses (known as accounts receivable).

Liabilities are funds acquired for a business through loans or the sale of property or services bought by the business on credit, i.e. creditors.

Shareholders’ equity (or net worth or capital) is money put into a business by its owners for use by the business in acquiring assets.

At any given time, a business’s assets equal the total contributions by the creditors and owners.

Assets = Liabilities + Net Worth

This formula is a basic premise of accounting. If a business owes more money to creditors than it possesses in value of assets owned, the net worth or owner’s equity of the business will be a negative number.

Given my creditors were increasing every month and the lack of regular stock takes, I really had no idea what the real situation was. I could only figure the situation wasn’t that good.

The second primary report included in a business’s Financial Statement is the Profit & Loss. This is a measurement of a businesses sales and expenses over a specific period of time. It is also prepared at regular intervals (again, each month and fiscal year end) to show the results of operating during those accounting periods.

Forecasting profits, particularly on a short-term basis, say one year to three years, is critical to the planning of business success. Estimating future business performance, based on the actual results from previous periods, enables the business owner to modify the operation of the business on a timely basis. At best all my accountant had done previously was look at the numbers for preparation of tax returns. We had never done anything regarding setting budgets or forecasting.

An interesting point here is that 80% of small business owners are dissatisfied with their accountants, so why don’t they find a new one? My view is that business owners believe it would be too difficult to change as they know my business, have all my data, etc.

If that’s the case, get over it! Find an accountant that will look after your ‘best interests’ and move now!

Break-Even Analysis

This was an eye opener for me....

‘Break-Even’ means a level of operations at which a business neither makes a profit nor sustains a loss. At this point, revenue is just enough to cover expenses.

Break-even requires the business owner to define a sales level - either in terms of revenue dollars to be earned, or in units to be sold within a given period - at which level the business would earn a before tax net profit of zero.

When I completed a break-even analysis on one of my stores, I discovered on a good week I’d break-even mid afternoon on a Friday and on a bad week mid morning on a Saturday. Given, we only traded six days a week in this store that left me between 6 and 11 hours to make profit. It quickly indicated everyone was doing ok out of the business except me as the owner!

Yes; suppliers, staff, customers were okay, it was only me that wasn’t being rewarded for my investment and the hours I was devoting to the business."

Book a 15 minute Complimentary Discovery Call with Bruce or Steve