Know Your Numbers:
The Financial Key to Accomplish Your Business Goals
In my series, 10 Lessons that “Rona” Is Teaching All Business Owners, I have discussed key lessons that the COVID-19 pandemic has forced small business owners (including myself) to face. So far, we’ve covered:
§ Why cash flow is king.
§ How a good business banking relationship can increase your access to capital in tough times.
For our final article of the series, let’s dive into how knowing your numbers is essential to gauge the current health of your business and figure out what is needed to achieve your future business goals.
Know Your Numbers.
During a consultation with a prospective client, I start by asking about their vision for the company. I want to know where they want their business to be in 1 year, 5 years and 10 years.
After learning their vision and goals, I ask how they plan to get there. They usually share ideas about what customer segments they would like to reach and the service or product offering they would expand into. Though these goals are important, business owners often have no specific plans on how they will scale the business operations to support that growth.
As we dig deeper, I begin to realize that they don’t know how their business is currently performing. This is when I share the key performance indicators that speak to the financial health of their business, including:
§ Revenue (month over month, year over year) → cash or IOUs for products sold or services performed.
§ Cost of goods or Cost of services sold → direct costs to run the business
§ Burn Rate → monthly overhead costs to operate the business.
§ Net Profit Margins → the % of revenue that remains after paying all direct costs and indirect costs.
§ Accounts Receivable Aging → how much customers owe the business as of 30 days, 60 days, 90+ days ago.
§ Liquidity Ratio → a company’s ability to repay its short-term debt with cash or near-cash resources.
These indicators help us to map out their current financial health. After all, how can we know where we’re going if we don’t know where we came from or where we stand?
My next step is to help them realize the harm they are doing by not tending to the current health of the business.
In order to plan for the future, I first help clients to see the story behind their numbers, get control and clarity of their financial position and implement strategies to increase cash flow and profitability.
Once that foundation is set, then we can then dream and perform scenario analysis to see what investments need to be made (in people, marketing or operations and equipment) to support growth into a new or expanded market.
Make Commitment-Based Decisions.
Once we’ve figured out the numbers you need to know, we can begin to plan.
Keep in mind that not every business owner is like that prospect. Many DO have a clear vision for their future and a roadmap of what it will take to accomplish their business goals. But, the pandemic may have completely squashed those plans (or so it seems).
If you are in this category, I urge you to make decisions based on commitment to your vision, not attachment to how you arrive.
We can all get attached to hopes, ideas, feelings, convictions and memories that cloud our perspective. Remember that there are many paths to a single destination.
One of my favorite poets, Robert Frost, wrote in The Road Not Taken – two roads diverged in a wood, and I took the one less traveled by, and that has made all the difference.
This pandemic has reminded me of Frost’s words because I have had to pivot my business and adjust service offerings and pricing in order to maintain. Despite the changes, my vision remains the same: educate, engage and empower business owners around their business financials. That is my commitment to my clients.
If you would like to understand the financial ramifications of pivoting your business, book a free consultation here.