Every business owner wants to maximize cash flow and profitability. But I’ve found that while business owners are excellent at their craft, they often struggle to understand and manage the financial side of their business. They don’t know where to start or what to do. This leads to making common mistakes that when left unchecked, can have a big impact on your bottom line. So what are those mistakes?
1. Not collecting accounts receivable.
I had a client that made $500,000 in profit last year after a year of losses. He asked me, “If I made so much money this year, where is it? I don’t see it in the bank account.” I took out his balance sheet and showed him the big number he had in accounts receivable and said, “There it is. When you collect all those receivables, it’ll be in your bank account.”
Many owners don’t know how to look at their balance sheet and understand issues of liquidity and don’t know how to look at their cash flow statement to understand where the cash is. Often these two reports are just numbers on a page that business owners don’t know to interpret. These owners are smart people, they’ve just never had any experience in accounting or finance.
2. Projecting revenue first.
In my experience, some professional services firms do projections, but not many. Those that do typically project revenue, and then back into a profit number. Remember, it’s not how much you make, but how much you keep. So, another common mistake is projecting revenue first. I typically do projections figuring how much profit I want to make and then back into the revenue number. On the income statement, project from the bottom up, not the top down.
3. Not delegating well.
While this may not seem like a financial mistake on the surface, the number one reason why businesses don’t grow is they don’t delegate well. Some business owners suffer from the malady that “they have to do it all themselves to be sure it’s done right”. As the business grows, we don’t create capacity for ourselves through delegation. If we continue to grow, some will suffer from burnout by trying to be all things in their organization. I have one client that’s high control and hasn’t delegated well. Now, that he’s ready to retire, the next level management hasn’t been developed to take over. So, there’s some ground to make up there.
4. Not having a sales process.
The last common financial mistake is also a sales mistake. Many businesses don’t have a sales process or sale system. The biggest financial impact you can make in your business is either increasing prices or volume. A 1% increase in revenue typically drives a 10% increase in net profit. People don’t like to be sold, but they do need help with aspects of their business like buying to accomplish a building expansion, buying equipment, or even buying a business.
I’ve concluded that “the level of activity we’re willing to adopt will be a limiting factor in our businesses.” Every 10 calls will generate 3 proposals and those proposals generate 1 order, or a close rate of .333. The process boils down to math. Calculate the average order and how many orders it will take to make your goal and then back into the proposals and calls. If you’re not hitting your numbers, typically the close rate is low, or the level of activity won’t allow you to hit your goal.
Tackling these common financial mistakes will put us traveling the road to increased profitability and cash flow. Every business owner deserves to have the business of their dreams.