“A business will make money in a down market and collect it in an up market”
Running a business isn’t easy. Every day there are challenges, opportunities, tasks and issues that all contribute to where a business finds itself at any given time. To help get through the daily grind an entrepreneur will use business coaches, consultants, webinars, training sessions and many other tools to ensure they are building their business properly. While these tools are very helpful there are certain principles that an entrepreneur can follow to guide their efforts each day. One of those principles is understanding what your business is fundamentally trying to do each day – is it learning how to make money or is it collecting money and reinvesting the results? This may seem like a strange concept but your ability to understand it can have a profound change in how you approach the daily grind of your business.
What is your balance sheet going to look like next year? The year after? What about three years from now? Do you care? Many times the answers to these questions are: not sure, no idea, don’t know and yes I care but I don’t have the information to properly answer these questions. It’s very typical for a small or medium sized business to not know what their financial statements are projected to look like over the coming year much less the next three years. Many times they will have a budget (that is usually inconsistent with their historical performance) but haven’t done the work to take the budget one step further and have it flow into an actual set of pro forma financial statements.
What are pro forma financial statements and why do they matter?
There is no such thing as easy money right? Are you sure? There are really only two ways to grow your revenue: cut costs or sell more. There is a limit to how much more revenue your business can earn by cutting costs whereas selling more is limitless. If you only had time to do one thing in your business it should be focusing on how to sell more. There is no easy way to do that then by figuring out how to sell more to existing clients either directly or indirectly. The more systematic you can make this the more profitable your business will be and ultimately your business will be worth more.
So how do you sell more to existing clients or customers?
It’s going to cost how much!!! You must be crazy!!!
That comment is made by entrepreneurs and business owners after hearing how much it costs to borrow money from either a mid market or private lender. The comment is usually followed by a series of expletives that I won’t type here but needless to say the cost of capital is something that can scare or upset someone who maybe hasn’t thought through the opportunity cost (see past blog post here). There is no such thing as free money when it comes to business but more importantly the money your business is using has a cost to it that you may never have thought about but you might want to.
People use to be paid based on their daily physical output. How many widgets could they build? How many trenches could they dig? How many calls could they answer and reroute. There was a time not long ago when people were the machines that made a business work – actually work. Today life is quite different. Technology continues to erode the physical work that people do and has left a void that only people can fill. In the past people were paid based on using their body to undertake physical or manual labour but in the future people will be paid based on using their brain to think and manage outcomes. The real question is: how is your business doing more with people?
If can happen to a large company (see story here) it most certainly can happen to your company. Surprisingly, many businesses that have never been through a tough moment fail to appreciate how often this happens. I am referring to a company not really knowing its costs and finding themselves in a position where they have to work out of a tough position because they didn’t realize what they didn’t know. Understanding the costs for your business is one of the most important things to know outside of understanding how to generate revenue. It seems simple but in practise can be a challenge many businesses struggle with.
Do you know what your business owns and owes? Do you know what your business makes and spends? More importantly – do you know what the equity is in your business or what it might be worth? It’s typical for an entrepreneur or for someone running a business to say “yes I know what we make and spend” but unlikely that they know what they own/owe and what the equity in their business is or what the value might be. Small and medium sized businesses can be so focused on surviving that they often don’t take time to see if the needle is moving in the right direction with respect to the equity or value of their business. This is unfortunate because one of the very reason businesses are started is to build value and one day be able to cash in or have that value recognized.
So where is the best place to start if you can relate to this?