You are missing the point?
It has often been said that “profit is meaningless and cash flow is king.” You know why?
It is possible for a business to show profit over a period of time and yet have negative cash flow. In fact, companies that make a profit (on paper) go under every day. Negative cash flow, if sustained for an extended period of time, will eventually cause the business to run out of money and go out of business. Therefore, knowing your cash flow position is critical to staying afloat and knowing how to unlock more cash flow is imperative to effectively coaching a business owner or senior executive.
Are you chasing the wrong target?
You may have the most brilliant product or service, but if the business runs out of cash, it won’t matter. Most businesses make the fatal mistake of thinking that they simply need more customers. If only they had more customers, they would have more sales and more profits…and they would be more successful.
But is this true?
Can companies just advertise their way to more sales and better results? No. In fact, advertising and discounts often have a negative impact on your bottom line and cash flow. Simply put, the initial instinct most business trainers and owners have is to focus on increasing sales. Employing this strategy (chasing customers and sales) is often the worst thing you can do for the business.
The common assumption is that if you have a business where the price you charge for your products is more than what they cost, then everything will be fine: you will be profitable and successful. The gains are nice, don’t get me wrong, but they just aren’t enough on their own. To be sustainable, the business must also have a healthy cash flow.
If you’re like most coaches and business owners, you never dreamed that the ability to understand how money comes in and out would be incredibly important. He thought, “That’s for the accountant or finance department to worry about. Sure, they might show me some reports from time to time, but I don’t see the need to really understand what the numbers mean. If there was a problem, they would tell me, right?
You probably didn’t realize that all those numbers, the financial DNA of the business, can tell you a lot more than you thought. They can tell you why the business isn’t growing or is having a hard time meeting targets. They can reveal why there is less money in the bank account [again] than there was last month.
Financial numbers ARE the story of the business. The numbers do not join. They are one of the few objective indicators of how a business is performing and where the problems are. Ironically, finance is the most overlooked area of business coaching with most professionals choosing to specialize in leadership, sales, or marketing disciplines. Unfortunately, without a solid understanding of finance, it is impossible to train effectively and produce predictable results.
Regardless of the justifications you (or your clients) use to explain why the business is not working: the economy, a shortage of “good” people, the competition, supply chain problems, etc. – the numbers tell the truth and can lead you to the solution. You just need to learn HOW to use them to your advantage.
You need a little financial foreplay.
Are you avoiding numbers?
When was the last time you took two hours out of your week to analyze the financial statements of a client or your own business? Can you honestly say that you know exactly where you (or they) are and WHY? Do you sometimes wonder what the numbers are trying to tell you? Are you guilty of spending money chasing new leads and sales instead of fixing the business and making it more profitable?
Most business managers and business owners make the mistake of assuming that they can improve the business by examining the profit and loss statement and the monthly balance sheet. Unfortunately, these statements only tell part of the story. In fact, you can’t gauge a company’s cash flow position by looking at the bank balance or examining the financial statements at a specific point in time.
This is because most businesses use what is called “accrual” accounting. Instead of recording ‘money spent’, they record spending as ‘money spent plus money committed to be spent’. So if the shares were purchased on account, the accrual ledger includes the value of that purchase from the time it is made, not from the time the account is paid. Accrual accounting takes into account the amount of money that has been spent plus the commitment to spend in the future. The same is true of earnings in reverse: it includes money received plus money expected to be received. When a sale is invoiced with 30 days to pay, the value of that invoice is included in retained earnings, even though the money won’t be received for at least another 30 days.
Therefore, when accountants talk about ‘profit’, they are usually referring to ‘growing profit’ as opposed to what we would call ‘actual or cash profit’. Retained earnings is the expected actual earnings after ‘expense already committed’ and ‘earnings expected to be received’ are taken into account along with actual (cash) expense and actual (cash) earnings. As a result, the profit shown on an income (or profit and loss) statement is a more complicated and less useful representation of a company’s current financial position. Net profit cannot be relied on in isolation to measure the financial health of a company.
Stated another way, cash flow must be tracked over a period of time and can be measured by the following calculation:
Net profit (year to date)
+/- inventory changes
+/- changes in accounts receivable
+/- changes in accounts payable and GST and
+/- changes in fixed assets
=
Cash flow
Changes to these 4 items on the Balance Sheet have a significant impact on cash flow and the viability of a business. That’s why getting inventory levels right, optimizing accounts receivable and payable, and investing only in assets that generate a return, is critical when advising a business of any size. In fact, a coach can often have a more tangible impact and influence on a business by focusing on these 4 areas than by directing the effort toward gaining new customers and increasing sales. And many times, it costs the company very little to implement highly effective strategies in these 4 areas.
In practice, it is essential to take into account both the actual profit (cash flow position) and the increase in profit. It’s a common mistake to focus solely on increasing profits, a mistake that has the potential to send a business into ruin prematurely.
Are you sure it’s profitable?
Profitable growth should be the goal of any business. However, you cannot achieve profitable growth without first establishing that the business is profitable. Attracting more leads or closing more sales may not be enough – costs and efficiencies in a business change every day and this means we must constantly monitor and measure results and take appropriate action. Focusing solely on customers and sales is a bit like spending 100% of your time practicing your tennis serve without looking at the score, analyzing your competitors’ strategy, and practicing your returns.
The break-even point is one of the simplest and most powerful calculations you can use yourself and your clients each month to measure and improve profitability. A company is said to break even during a period (usually a month) when its sales revenues meet its costs. Specifically, accountants talk about the breakeven point as the point where “fixed costs” (rent, salaries, etc.) equalize “gross profit margin” (sales revenue minus COGS).
Therefore, it follows that the breakeven point with profit is the point in the month at which the company covers all fixed and variable costs and begins to achieve the desired profit target. Remember, if you and your clients are in business and don’t have a charity, the goal is profitable growth. To achieve gains, you MUST, in fact, plan to achieve them.
Calculating the break-even point (and the break-even point with earnings) each month, and knowing specifically what day of the month the business breaks even, enables management to make informed strategic decisions about how to achieve growth that is profitable for the business. bottom line and improve cash flow position.
Are you ready to get results?
Knowing where the financial pain is in a business will allow you to focus your time and resources where they will help your clients make the biggest impact on the bottom line. And if you’re really serious about being a successful business coach, and it’s not just a hobby or a way to pass the time, you’ll find a way to fit a little financial foreplay into your day so you can help others get your business in shape and start taking home more cash! It’s the fastest and most effective way to get your clients to work IN, not just IN, their business.