Small Business Success
Let’s say we bump into each other in the lemonade line during a 15-minute intermission at a Grateful Dead concert.
As we wait for our refreshments, you ask me to take the next three minutes and explain some of the financial keys of operating a small business.
So here you go, in three minutes or less.
First, focus on three financial statement practices:
1. Produce them regularly
Managing statements are best, but for very small companies, quarterly might work.
2. Ensure accuracy
The Mars Climate Orbiter burned up entering the Martian atmosphere because the manufacturer used feet and inches to build it, and NASA used the metric system to deploy it. Result: spin, crash and burn.
It doesn’t take rocket science to get departments to track and report their activity. But it does take coordination and communication to produce accurate reports you can use to manage your business, so you can make sure it doesn’t spin, crash and burn.
3. Understand them
The good news is you don’t have to be an accountant to manage with your financial statements. And the more you use them, the better you’ll get at managing with them.
Now let’s talk about cash.
Here’s a sad, but common, story: A small business was so successful it failed.
How could this be? As the business grew, the owner failed to understand that growth requires the funding of two vital financial elements: inventory and accounts receivable.
A common definition of both of these is: current assets you can’t spend. And as proud as you may be of how your inventory and A/R numbers look on your balance sheet, remember that until the former is sold and the latter is collected, either asset could morph into a liability quicker than you can say, “How am I going to make payroll on Friday?”
You’ll get into trouble if you think you have to make inventory available to customers just-in-case. Instead, adopt the prudent practice of delivering products just-in-time.
I know you’re excited about the contract you just got with that big customer. But don’t forget, if you have a 30 percent profit margin and you give customers 30-day terms, that means you have to fund 70 percent of that sale until you get paid, which can often take more than 30 days.
Remember, if you sell something without getting paid, you haven’t so much made a sale as you’ve made a loan.
The time it takes to sell inventory, and get paid for that sale, must be funded with working capital from some source. And any growing company that doesn’t understand and prepare for that fact might just spin, crash and burn.
Write this on a rock… “If you own a business, financial management is job one. If you plan to start a business, don’t do it until you understand how to manage the finances.”
Hey! There’s the music. Let’s get back to the concert.
Jim Blasingame
Small Business Expert and host of The Small Business Advocate Show
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