Original article shared by Edward Allon
In working with small growing entrepreneurial businesses, I have discovered several common financial related issues with which they struggle. When I first start working with these businesses, most if not all of these issues exist. All of them are critical to their success in managing and growing their businesses. The good news is that with time and focus they can be rectified. In no particular order, here are 5 that I see most:
1. Lack of Timely and Accurate Financial Statements
In today’s business environment, decisions are made at a fast pace. Information is readily available via the Internet, yet internal financial information to improve the decision-making process is sadly deficient. Most business decisions have financial implications, and without this basic financial information, it may be a shot in the dark. Many times the financial statements are put in a drawer and never reviewed because the information is too old (not timely), the business owner doesn’t believe the information is correct (not accurate) or the financial statements support the preparation of the income tax return, not running the business (not operational). They usually only become important when the business owner needs to meet with the bank.
2. No Cash Management
As we all know from operating a business, cash is king! It is the common denominator for all businesses NO CASH = NO BUSINESS. Other than the current cash balance (most of the time determined by looking at the bank’s balance) most small businesses don’t manage their cash. Cash management includes understanding your business’s “operating cycle” (i.e. cash to cash cycle). To improve your “operating cycle” it is imperative you understand what it means, how to calculate it, and what influences it before you can improve it. Many times I will ask “what do you expect your cash balance to be in 6 months?” Most of the time they are fighting cash flow problems today and can’t think about the future past this week. Managing cash flow will provide a real sense of control over the business.
3. Poor Pricing Management
Setting the price of our products or services will drive revenues and just as importantly the “gross margin” for the business. Unfortunately, not enough time and attention is provided to this aspect of business. In working with small business owners, I find many have not revised their “pricing formulas” for some time, while others don’t really know their underlying costs to derive a sales price that provides profit. Many products are market driven because of competition, so it is imperative to know not only the direct costs but all costs necessary to produce a profit. Gross margin analysis by product line, products or customer is critical for small businesses.