Chapter 7
KNOW YOUR NUMBERS
Money doesn't need to be scary. In fact, when properly organised, its management not only becomes easy but also enjoyable, as you're able to look through the numbers for your business and understand instantly how much money you're making or losing. As a business owner this is your scoreboard.
When I started out in business at the ripe old age of 18, I didn't know what an invoice was, let alone understand anything about financial management. The idea of ‘finance' was something I found overly complex, and I was guilty of not yet appreciating just how important it was for me, as a business owner, to know my numbers.
As my career developed and the businesses I was overseeing grew larger, financial management became crucial to making decisions — when to hire staff; whether we could afford to give someone a pay rise; where we were spending our money and whether some areas could be minimised; what revenue streams were bringing in money and whether they could be maximised; whether we could start to use larger suppliers; and how much we could afford to pay for rent and other expenses. All of these things needed up-to-date and accurate financial information for me to make an informed decision.
What I found was that when I had the right people in the right positions, managing the money of the business became easy.
So often I hear stories of business owners staying up until midnight as they ‘do their books', or retailers sitting in their store on a Sunday doing their books on their laptop as customers come in and out of the shop.
In terms of ‘doing your books' (sending invoices, paying staff, paying invoices, reconciling what should be in the bank and what is in the bank) — all of these functions can be outsourced for as little as $40 an hour. As soon as you get to a point where there is any volume of bookkeeping required, you should be able to outlay a couple of hundred dollars each month on having someone do that job for you while you continue to spend 80 per cent of your time on sales and marketing activities — activities that should be worth a lot more than $40 an hour to the company.
In this chapter, we'll explore the three things you need and the three people you need to manage and monitor your money in a way that is lean and yet gives you absolute clarity, so that you have all of the information you need at your fingertips, at any time of the day and anywhere in the world. This is the new way of doing business.
the business scoreboard
In business, money is the scoreboard. Even if you're not in business primarily to make money, and your ‘business' is about pushing your cause or spreading your message, money still needs to be your scoreboard that will underpin your success.
With it, your business, your vision and your message will travel. It will travel through the great people you can afford to employ and motivate; it will resonate through the great partners you can afford to ally yourself with; it will permeate through the media, which will realise you're a credible financial organisation; and it will give confidence to the investors you want to talk to about funding your expansion.
Regardless of what business you are in, or why you are in it, how well you do financially will determine how well you do as an organisation as a whole.
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@jackdelosa Regardless of why you are in business, money will be the underlying scoreboard. #unprofessional |
In business the most dangerous thing you can do is coast from month to month without truly knowing how much money you have made or lost. Some people do this for years, working around the clock on a business that in reality is less profitable than a well-paying job. Not having an accurate financial picture of what they achieve each month means they have little visibility over whether the business is progressing or whether they are simply maintaining the business year to year.
One of the most crucial things to have in business is a financial scorecard — something that tells you every month whether you have gone up or down, and will paint a picture of why you have gone up or down. This not only ensures you can measure your performance against your growth targets, and therefore know whether the business is progressing, but also means you have the information at hand to make important business decisions that will lead to the business developing further.
Not having an accurate and up-to-date financial scoreboard in business that is analysed and discussed monthly is like playing a game of AFL without the goalposts, or a game of rugby without the try line. It means that nobody knows what success looks like, and we have missed the point of the game — players are simply running around getting tired, with no real outcome or objective.
the three things you need
To create a financial scoreboard in an early-stage business is simple, and it can be done in a way that is very lean. Let's look at the three things you need to give you complete financial visibility across your entire business:
- profit and loss statement (P&L)
- balance sheet
- 12-month budget.
We will also look at the three people you need to manage your scoreboard.
profit and loss statement
The vast majority of small businesses in Australia don't know their numbers and have only ‘gut feel' as to whether they're making money and, if so, how much.
An up-to-date profit and loss (P&L) statement is the first thing you need to accurately track your numbers. A profit and loss statement is a report that outlines how much income has come in over a given period, such as a month, what your cost of goods was, and what your operating expenses were.
Your P&L looks backwards over a certain period to tell you how the business performed. For instance, a good P&L will allow you to look at how much money you have made or lost over the last month, quarter or year.
A regular monthly P&L statement is critical to knowing whether you're making money, and how much you are making (or losing) each month. It will also allow you to look at which revenue streams are your best, and which expenses are your biggest, which will bring some financial intelligence into your decision-making as a business owner.
By looking at your P&L, and seeing which products or revenue streams are your best, you can then focus more on these. You can see which products aren't performing as well as you would have liked, and you can either look for ways to grow them or, better yet, get rid of them and focus on the products that are higher earners. You can also look at all your costs and see where and what you are spending your money on, so you can work out where you can reduce costs within the business.
At The Entourage, we have developed a business education institution that we believe will be the model of the future for people wanting a real-world business education from people who have ‘been there, done that' experience. Our vision is to create a globally recognised institution where people come not only because they want a qualification, but also because they want an education — they want to develop the ability to build a multimillion-dollar company.
In just the last 12 months, from analysing the information on our P&L statements every month, we have stopped delivering some products altogether, shifted the entire business model, redirected all of our focus to the programs that add the most value to our clients and generate the most revenue for the business, and even merged two of our companies. All of these significant decisions, which today mould who we are as an organisation, would not have been made had we not had a meaningful P&L to look at.
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@jackdelosa Significant shifts in a business model should be grounded in financial information. #unprofessional |
Your P&L is also a great gauge of what your customers want, because today consumers vote with their wallets. Your profitable product lines that bring in most of your revenue are the product lines where your consumers are saying, ‘We love this. We want more of this.' And they are saying about the product lines that aren't profitable, ‘This is not of interest to us. Let's try something else.' Your P&L is the most accurate form of market research that exists, and knowing your numbers means you know your customer.
The good news is you don't need to know how to create a P&L. When we discuss the three people you need to manage your finances, I talk about how these reports are generated and by whom. It is a lot easier and cheaper than you think.
As your business grows, it should be shaped by this financial information. As an entrepreneur, you are an explorer — you are constantly exploring unfamiliar territory for opportunity. As you explore your market, this information should act as a compass, helping you to steer the ship to profitability by the quickest and most effective path. This is not to say you don't innovate and take risks; it is to say that, when you do make the decision to go off course and take risks, you do so in the most informed and calculated way possible. This is the mark of a true entrepreneur.
| To see a template of a real-life P&L, visit www.unprofessional.com.au/bonuses. |  |
balance sheet
Your balance sheet is a summary of the assets and liabilities of your business. While your P&L tells you how the business performed month to month, your balance sheet tells you the financial position of the business in terms of what you own and what is owed to you (your assets), versus what you owe to other organisations (your liabilities). These are indicators that are not picked up in your P&L, so it's important to have both in order to gauge the financial health of your business.
The assets on your balance sheet will include things like:
- cash at bank — how much money you have in the bank
- accounts receivable — how much money you are owed by customers
- any property or stock that you currently own.
The liabilities on your balance sheet will include things like:
- accounts payable — how much you owe to suppliers
- employee and tax obligations — how much you owe the tax office in terms of PAYG (pay as you go) withholding tax, income tax and GST
- any loans or debts that the company has.
You can see that, with an accurate P&L showing the financial performance of the business and an up-to-date balance sheet, you can really start to get an insight into the financial health of your business. Using these two things together is critical for effective financial management and will ensure that you always have your finger on the pulse in terms of the financial health of your organisation.
As an explorer, if your P&L is your compass, then your balance sheet is your stock check. The balance sheet shows what you are carrying on your ship in the way of supplies, and what is going to be required on the coming journey. It shows you how much water is on board and how much food you have relative to the size of the ship and crew. Are there enough supplies on board to keep the ship moving in the right direction?
12-month budget
A P&L looks backwards; a balance sheet looks at the present; and a 12-month budget helps you see forward.
A 12-month budget is essentially a projected P&L that looks forward. It is in the same format, with the same line items as your P&L, and it simply outlines what you expect the company to bring in and spend each month for the coming 12 months.
This is critical for any business, because in its absence, the business will simply coast along month by month, not knowing how it is performing relative to the entrepreneur's expectations. Without monthly targets to work towards, it is too easy to get caught in a cycle of non-performance. Every now and again the entrepreneur thinks about the financial performance of the business, but can't really pinpoint whether the company is exceeding or not reaching the targets set.
When you have a well-thought-out budget, every month you have something to measure yourself against. As a business owner, you will inherently lack structure, particularly in the early stage of your business. You don't have a manager looking over your shoulder, checking that you're meeting your targets and asking you questions to help you perform better. As business owners, we need to provide the structure for ourselves. By having a forward-looking 12-month financial budget and measuring it against what you actually achieve every month, you give yourself some much-needed structure that will ensure you ask yourself the right questions about how you can build your business in the most effective way.
As an explorer, your 12-month forward-looking budget is your telescope. Every time you stand on deck and look through your telescope, you can see the forward-looking direction, the condition of the ocean and the point you're aiming for on the horizon. This lets you know what's coming up and how you can best prepare your ship and crew for the seas ahead. With your compass guiding you, regular stock checks to ensure you have enough supplies and your telescope to look forward, you will have everything you need to navigate your ship through both stormy weather and calm seas. Just remember, calm oceans never made a skilful sailor.
| To download a 12-month budget template in Excel format, visit www.unprofessional.com.au/bonuses. | |
the three people you need
To manage the finances of your business with crystal clear clarity, you only need to have three people in place. These three people will manage your day-to-day accounts, produce the reports and help you make sense of them — all for as little as a couple of hundred dollars per month. Each of these three functions is outsourced, and these people are used only on a needs basis, which means it is relatively inexpensive to have some great people on board doing meaningful work. The three people are:
- the bookkeeper
- the accountant
- the chief financial officer (CFO).
bookkeeper
The first person you need to accurately manage and monitor your finances is a bookkeeper. This person does the administrative and operational tasks that relate to managing the finances of the business.
The roles of a good bookkeeper are:
- producing invoices and receipts for clients
- managing and processing all payments and expenses
- collecting debts
- performing bank reconciliations — making sure everything that is meant to be coming in and going out is actually coming in and going out
- processing payroll according to your pay run period, such as weekly, fortnightly or monthly
- helping with the development of your forward-looking 12-month budget
- extracting regular reports from your accounting software, such as your P&L, balance sheet and business activity statements (BAS).
The bookkeeper is the least senior of the three people you need and current market rates for a good bookkeeper range from $30 to $40 per hour. This is a very wise investment for any business owner to make, because employing a book-keeper will free them up for hours each month to work on higher value activities.
| Go to www.unprofessional.com.au/bonuses to download your bookkeeper position description. | |
accountant
While your bookkeeper does the day-to-day, week-to-week tasks, they will feed this information and their reports to your accountant, who offers high-level tax and financial advice. Your accountant will also lodge all of your compliance work with the tax office, including your quarterly BAS, PAYG tax and company income tax. If you're not familiar with what these three things are, that's what the accountants are here for.
The roles of a good accountant are:
- assisting in setting up the financial reports, including the structure of the company P&L, balance sheet and forecasts
- projecting and planning for tax payments that will have to be paid and ensure the company manages cash flow in such a way that sees tax payments being made on time
- reporting to management on the financial health of the business
- helping guide the bookkeeper to be as efficient and as effective as possible
- analysing the financial reports to identify where the company can reduce costs without damaging the business or the brand.
| Go to www.unprofessional.com.au/bonuses to download an accountant position description. | |
chief financial officer
Once you have clear bookkeeping in place and an accountant who is effectively managing your tax, you need to engage a part-time chief financial officer (CFO) for a couple of hours per month to talk strategy. A great CFO should bring business and financial experience to the table and be able to help you make better business decisions. While the bookkeeper is an administrative role and the accountant is a compliance and tax role, the CFO is a forward-looking strategic role that is there to help you make smarter financial decisions. That can include when you should bring on staff; how you should remunerate them; whether you should have your own premises; whether you should handle stock or drop-ship straight to your customers; whether you could be paying the bank less money in bank fees each year; whether to raise money from investors; and when and how to expand into new markets. These are all decisions that should be grounded in financial data, and a great CFO should be proactively making these suggestions to you in order to make your business more robust and profitable.
The roles of a good CFO include:
- improving the cash flow of the business by analysing the financial reporting in the business; this may involve reviewing large customer accounts, payment terms, supplier agreements, and inventory and cash management
- assisting in the development of all financial models and reports across the company, helping set benchmarks and key targets for the organisation to achieve; this involves helping you create your vital signs and develop your financial scoreboard
- offering guidance on funding requirements for raising money from investors, and staffing and people efficiency, as well as assisting with strategic business planning at a board level
- advising on the long-term strategy of the business and what the business needs to achieve in order to maximise its value and perhaps even develop a path to exit if you want to sell your business one day; the CFO can help identify the core value drivers in the business and outline how to best enhance these value drivers.
| Go to www.unprofessional.com.au/bonuses to download a CFO position description. | |
this will all change
As your business grows, so too will the ways in which you manage the finances of the company. More importantly, often the accountant or the bookkeeper that you start out with won't be the right person for the job a year or two down the track. As the company grows, you will need to continually find new people whose expertise allows them to stay ahead of the company.
One of the core measures I use to decide whether people are right for the business is based on whether they are driving us or we are driving them. Are we making suggestions to them and guiding them on how it should be done, or are they directing us on how it should be done? The whole point of surrounding yourself with these three people is to ensure that you have people who know more about financial management than you do, and that they can help you stay ahead of the business, proactively planning and putting things in place to ensure the business is as successful as it can be. If your people are simply reacting to what's happening, then it might just be time to find better people.
This is an inevitable part of business. The early stages of a business are so dynamic and change happens so quickly that it is rare for you to find people who will be able to grow at the same rate as the business.
I am fortunate that, after being in business for almost a decade now, I have built my A-team, which is constantly on the front foot and constantly directing me on the best moves to ensure the success of our businesses. But I had to battle through many C-grade and B-grade players before I found the A-grade players.
You to need to build your A-team knowing full well that they may change every now and again as you navigate your way through the early stages of this game called business.
| To see who I use to manage our company finances, and why, go to www.unprofessional.com.au/blackbook. | |