Know What Your Numbers Mean
To effectively use your financial team, you have to understand your business's finances.
By: Chia-Li Chien | Published 06/22/2010
Have you ever faced a situation in your business and found yourself saying, "I know I need to do something, but I don't know what. Just tell me what to do and I will do it." Emotionally you feel panic, fear or even shame, especially when it comes to business finances. Potentially, that could trickle down to your personal finances, as well.
Perhaps you're aware that you made some reactive or poor decisions and, as a result, feel as though you're out of control. The longer you stay in this mode, the more unproductive you'll become. You'll end up losing sleep at night, working until 3 a.m. and losing your connection with your family.
Finance is a difficult topic to talk about, especially since most people don't fully understand it. In many cases, your CPA and financial advisors might as well be speaking Greek. Unfortunately, unless you learn what the numbers mean to you, you can't utilize your financial advisors effectively, from your bookkeeper to your chief financial officer.
How can you solve this dilemma?
1. Monitor your business financial statements on a regular basis. Ask your financial team to keep you up-to-date about your financial statements. You're looking at your bottom line, net profit, expenses and checking balance. That's especially true if you have a large amount of net profit on paper but barely any money in your business checking account. You need to know why and how that happens. Checking your financial statements on a monthly basis is a great start. Don't wait until it's time to file your tax return. It'll be too late to fix anything.
2. Develop a set of key performance indicators for your business. Beyond the financial statements, you want to monitor your business's health status. For example, if 40 percent of your accounts receivable are more than 30 days old, pick up the phone and call your customers or clients. You're not financing their purchase, and you're not in the lending business.
They're taking advantage of your good nature and your desire to continue the good relationship. But remember this: If you can't survive, there's no relationship to maintain. Work with your financial team to develop a set of key performance indicators for your business. That way you'll know what to look for so you can proactively make corrections along the way.
3. Diversify your client base. You already know that relying on one or two clients to support your livelihood is not the right thing to do. If the majority of your revenue comes from one or two clients, have a plan to slowly diversify your client base. Otherwise, you're only one phone call away from oblivion.
4. Find out whether you're paying your employees too much. Entrepreneurs are the world's most generous people. We know how hard it is to start a business, and we appreciate our employees' contributions. Therefore, we keep giving them salary increases because we want them to be successful. You can find salary statistics online. Check your industry and geographic location to find out whether you're paying appropriate salaries.
You should consider pay for performance, because you're not running a government center or a Fortune 1000 company. You need to demand a certain return on investment from each productive employee. Note that proper communication is crucial to help implement a pay-for-performance compensation model.
5. Delegate and hold your team accountable. Most entrepreneurs are do-it-yourself types of people. We hold things close to the vest. But when your business grows, you have more people on your team; you have more advisors, coaches and mentors surrounding you. You have to delegate things you used to do yourself.
However, we often forget to hold our team accountable for the work. As a result, we feel as though things were not done correctly. Define each role carefully and set the expectation of what success looks like. We can't do it all, but we need to wear that "control freak" badge proudly. Because no one cares more about your business than you do.
A little education from your financial team will help you establish these activities as routine and help you focus on more important things, such as retaining clients and increasing revenue and profitability. You can gain a comfortable level of control over your finances by monitoring your business's profit margin on a regular, routine basis.
Chia-Li Chien, CFP®, CRPC, PMP; helps women entrepreneurs to convert their business into meaningful personal wealth. She is the author of Show Me The Money and columnist for WomenEntrepreneur.com & Fox Business online. She is available for consulting, speaking engagements and workshops. She can be reached at www.chialichien.com or email@example.com.
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