In last week’s interview, Lisa Gearing lamented how if you really want to be successful in business, in life and with mountain climbing, you have to have a strategy and a plan. The problem with nine out of ten entrepreneurs is that they don’t have a plan and they don’t have a strategy.
This week’s newsletter is all about pausing, about stopping to take stock of where you are on your journey to extreme business financial success, of re-evaluating how successful is your business strategy and plan.
Why is this a great time of the year to take stock?
- In South Africa, many smaller businesses have the end of February as their financial year end.
- If this applies to you it means that by 31 August half of your financial year has passed: We are officially heading for what some people refer to as the “silly season”.
- Even if your financial year end is not the end of February, now is the time of the year when you are maybe starting to feel a bit burnt out.
- Now is a great time to take stock of where you are in the performance of your business, to take a breather and rejuvenate.
Taking stock: Measuring financial performance.
The accounting records of your business are used to record the financial effect of your actions and decisions as they occur. They are also used to prepare management reports which are used to measure business financial performance: For example, what did we produce, what have we sold and to whom, are we overstocked in some areas and under stocked in others?
The income statement: It is not about how much you sold, but about how much you kept.
The income statement reports sales less expenses. The problem is that many entrepreneurs focus mainly on sales and do not give nearly enough attention on the management of expenses. The result is often that the business makes a loss.
If you really want to be successful in business, you have to insure that your business makes a profit. This happens when your sales exceed the expenses incurred to generate those sales.
What do you measure?
You use your income statement to measure the following:
- This year to date versus last year to date
- This is a very useful report and tells you if you are ahead or behind versus last year, or standing still.
- Don’t forget to factor in inflation: If inflation is 5% in your industry, then your profits must have grown by at least 5% versus last year otherwise your business is in reverse gear.
- This month versus this month last year
- Budget versus actual
- If you don’t have a budget, now is a great time to put one in place!
Measure what really matters in your industry
Last week on a webinar I was asked by a participant what reports to use for a large grocery store with many departments and stock items.
My reply: Measure what really matters. For example, with a large grocery store:
- The company totals will be of limited value
- Of much greater value will be the sales, cost of sales and gross profit by department and then by stock item
- Although the expenses are fairly fixed, they can creep up so measure these as well
- It’s all about the bottom line: How much profit has your business made?
Cash flow versus profit
- If your business is unprofitable, you will very likely be under cash flow pressure
- You will have to find funding to fund the losses
- If your business is profitable, you can still be under cash flow pressure
- For example: If don’t collect your debtors or if your business is overstocked
- But, the problem can be fixed
Now is a great time to revisit your business strategy and to formulate your business plan and budget for the next 6 months:
What is your business strategy?
- Your business strategy is like your road map which determines the direction of your business and what you want it to look like in the future.
- By clearly defining the strategy, you’ll have the guidelines and structure to develop your business or growth plan and achieve your business goals.
- Remember, you cannot be all things to all customers. You do not have to be the market leader to compete successfully, but you do need to focus on your company’s strengths to find a way to differentiate from other competitors.
What is your business plan for the next 6 months?
- What has been working well and should be continued with?
- What did not work that well and needs to be improved upon?
- What plan is there to implement these decisions?
- What should you focus on?
Remember that without a road map or plan, and sticking to it, any destination will do!
Here is a great example of getting it right and also getting it horribly wrong:
- 1st example: Example of the food manufacturer who is getting it right!
- The business was short of cash flow
- Accounting for Entrepreneurs analysed the management accounts
- The analysis revealed that the business was focusing on low margin products
- This has led to a change of focus to high margin products:
- Feed through to production
- Feed through to marketing department
- Outcome: The analysis and measurement gave insight to the action plans to focus on for the next 6 months
- It will have a major impact on the profitability, success and value of the business
- 2nd example: The big spending entrepreneur who is getting is very wrong!
- She has a business plan and budget but is not sticking to it
- There is no limit to misdirected and unnecessary spending
- The business has got itself into serious financial trouble
- Her reputation is in tatters: With her suppliers, service providers and staff
- Huge losses have built up which the business is struggling to finance and struggling to survive
Success in business starts with a well thought out strategy and plan followed by massive action to implement the plan whilst measuring the outcomes and adjusting where necessary.
Have you tried so hard to accelerate your business but are held back by the paperwork?
At Accounting for Entrepreneurs, we help businesses such as you move from manual, excel or desktop based solutions to cloud based accounting technologies. We save you time and money and put you in control of your business. That is a great benefit in today’s fast paced business environment.
For further details:
- Visit our website at https://a4e.co.za
- Send an email to email@example.com
- Call Robert Jewell on 082 575 4379
Catch Robert Jewell on Impact Radio every Monday at 18h00: Business Financial Mastery.