Global Profitability Guru Shares 5 Financial Mistakes Business Owners Should Avoid
With almost 40 years of experience behind me and having owned eight businesses myself, I know that the reality for many business owners is that the first time they pay close attention to the financial side of the company is when they get in trouble, whether that’s that they can’t meet payroll, supplier bills are late, a huge customer leaves, or there is a huge unexpected tax bill or another seemingly catastrophic situation occurs… I am on a mission to prevent these mistakes before it is too late and give you the tools to prevent business situations that cause sleepless nights and worry.
I have been instrumental in helping businesses grow profitably through; consulting, speaking, training, my books, and Operations Manuals and I am now well-known across the US and beyond as ‘The Profitability Guru’. My goal is to give business owners the processes and tools to get and stay profitable as well as build wealth.
In both the US and the UK, there are some people who think profit is a “dirty word.” It’s not and it’s necessary to survive and achieve the business goals and life that you want to achieve.
Here are 5 Financial Mistakes Business Owners Should Avoid
Believing That Profit Is a Bad Word
Many business owners think profit is bad. As a result, they don’t price profitably, and then they struggle. They work themselves harder than they would if they were employees of another company. The lack of profit causes cash flow problems, and they experience sleepless nights and stress. Profit is necessary for business survival, even lifestyle businesses, which focus more on cash than profits. Profit must be turned into cash. Cash is necessary to fund payroll and other business expenses. Profit is used to fund growth, increase salaries, increase inventory (if you have inventory), and increasing overhead expenses. Without sufficient cash businesses will die.
Abdicating the Responsibility for the Financial Side of Your Company
I hired a bookkeeper. Now I don’t have to worry about the books anymore. The first office person an owner hires is usually a bookkeeper. Then they ignore the financial side of the company because they think, It’s being taken care of. You can delegate responsibility for day-to-day bookkeeping activities, but you cannot abdicate the responsibility for the financial side of your company. You must retain oversight and review every week and every month. It’s your business. You have to oversee all of it, including financials. Your financial statements are your scorecard. You have to know what they are telling you so you can spot minor issues and take care of them before they become major crises.
Having Mercedes-Benz Syndrome
This is where business owners want to use their business to pay for their personal lifestyle and instead of investing in the business, they invest in themselves. Don’t get me wrong. There is absolutely nothing wrong with enjoying the fruits of your labour, however, you can’t do it at the expense of your business. You have to save cash for the downturns. You have to save for a rainy day. Having cash does not always mean profits and having cash does not mean that you have to spend it. Make sure that you are earning enough on products to generate reasonable profits and you save some of the money you generate from collections on those sales -this is especially important if you are looking to attract investors.
Focusing on the Top Line Rather Than the Bottom Line
Running a successful, sustainable business is not about how much you generate, it’s how much you keep. Volume is vanity. Profits are sanity. The top line is important, but the bottom line is more important. Many small business owners brag about revenue growth, but almost no one brags about profit growth. Track overhead cost per hour and net profit per hour to ensure that your company is profitable as you grow. Calculate these two figures on a yearly basis, and review them every quarter. Shift your focus from growing the top line to growing the bottom line—your net profit.
Having Financial Statement Fruit Salad
Financial statement fruit salad is when a profit and loss statement reports revenues with no expenses incurred producing the work for revenues, or expenses are reported in a month without the revenues generated by those expenses. If you put revenues in one month and expenses in another month, you are fooling yourself. Here’s what happens: the month with the revenues and no expenses will look like a great month from a profit perspective. You’ll probably be feeling great about the business. The month that has the expenses and no revenues will be a profit loser, and you may feel bad about the business. Neither is accurate. You can’t make good business decisions with inaccurate financial statements.