Why are your numbers so important?
At the moment I’m in the process of writing a book to help business owners, like you, called ‘A Business Owners Guide to Understanding Your Financials’.
I’ve decide to share some of this with you and I’d love your feedback. Here’s a section on why your numbers are so important …
Why are your numbers so important?
Numbers are the language of business. They show what’s working and what’s not. If you don’t understand your numbers, how are you supposed to tell if what you’re doing is working?
We wouldn’t watch professional sport if we didn’t keep score or understand what the score means. It’s the same in business. You need to understand what your numbers say and what that means for your business.
Warren Buffett, someone who knows a thing or two about numbers, says:
“If you can’t read the scoreboard, you don’t know the score, and if you don’t know the score you can’t tell the winners from the losers.”
Most business owners I meet don’t have a clue about the numbers or where to start to understand them. They actually find it boring, which as a trained accountant myself I find it so hard to believe!
Here’s what Robert Kiyosaki, the author of Rich Dad Poor Dad, said about numbers:
“Now, accounting is possibly the most boring subject in the world. It can also be the most confusing. But if you want to be rich, long term, it could be the most important subject.“
Talking another language …
A few years ago I went to visit my brother in China. Here I was in the middle of Shanghai surrounded by people who spoke a different language and who couldn’t speak a word of English.
Getting anything was a nightmare. There was lots of pointing and head-scratching with nobody understanding what was going on, just like most business owners when they look at a set of figures.
As a business owner you don’t have to be an expert on the numbers; leave that to your accountant and bookkeeper. But it is important that you understand the basic principles.
This chapter is about unravelling the fundamentals that you need to understand as a business owner to give you a massive advantage in running your business.
By the time I was leaving China I had learnt a few basic words that made it so much easier for me, and that’s what you need to do. Learn the basics so you can understand what your numbers are saying to you.
Also, it helps to have someone who is fluent in the language of business and your numbers on hand to help and support you. The only way I got through my trip to China is because my brother, who was fluent in Mandarin, was there to support me.
So make sure you get yourself a good accountant and bookkeeper that can support you with this. Too often I see business owners trying to save money by employing a cheap accountant, or they do the bookkeeping themselves. Invest in a good accountant and bookkeeper; their support is invaluable.
A poor one can end up costing you thousands. There’s a great quote from Red Adair that goes:
“If you think it’s expensive to hire a professional to do a job, wait until you fire an amateur.”
I’ve seen business owners who for the sake of a few hundred dollars stick with a poor accountant and lose thousands because they didn’t do the job properly. Don’t make the same mistake; find yourself a good accountant and bookkeeper to support you and help you understand what the numbers say.
So let’s start with a few basic concepts …
Turnover, Profit and Cash …
There’s a great saying that you need to memorise and use in your business. I’ve been teaching this for years and it could be your saviour …
Turnover’s vanity, profit’s sanity, but cash is king …
If you can only take one thing away from this book and live by it in your business then this should be it. But what does it mean?
Let’s start with turnover. Turnover is your sales, income or revenue. Every business needs sales and a lot of your time and resources should go into driving sales through the business.
It is really important that you’re focusing hard on driving sales, but you don’t want to be driving sales at the expenses of profit or cash.
Most business improvement programs focus on increasing turnover and most business owners focus on it too, boasting about the size of their business or the growth they’ve achieved. That’s why turnover is vanity.
The size of your turnover isn’t the most important thing. Unless you’re a new business and need to establish a level of repeat sales, then nine times out of ten the last thing you want to do is focus on increasing sales without first focusing on profit and cash.
If I was to ask you why most businesses fail, what would you say? Most people say either it’s a lack of sales or they ran out of cash. And if you said that, then you’d be wrong! Most businesses actually fail because they grow too quickly before they’re ready. It sounds counter intuitive, doesn’t it?
I’ll give you an example of a new home builder I worked with where they suffered after increasing their sales massively. But first I need to explain what profit and cash are.
The first thing to note is that profit and cash are two different things. So often I’ve had clients who look at their financials and see a good profit and say:
“Great, but where the hell is it? I’ve got no money in the bank!”
Well, all will be revealed when I explain why these figures are so different later on, but for now just remember they’re very different. And by understanding this difference you will be in a much stronger position to improve both. But first let’s explain what each one is.
Profit is the reason you’re in business. It’s your return for the effort, money and assets you put into your business.
If you’re not earning enough profit you may as well close your business, invest your money elsewhere and put your efforts into something else. It’s that simple and that’s why profit is sanity.
Cash is the heartbeat of your business. When your cash runs out your business dies, so cash is king!
As the business owner you must fully comprehend how cash works and be in full control of it. At the end of the day it doesn’t matter if you don’t understand any other financial reports as long as you understand cash!
Otherwise, it’s like a surgeon not bothering to monitor your heart while doing open-heart surgery. You’re putting the life of your business on the line.
You could grow a successful billion-dollar empire by just having a good understanding of cash with a grasp on profit. Just ask Richard Branson the serial entrepreneur or media mogul Felix Dennis, both billionaires who have confessed to only understanding the basics of business finances.
The important thing here is to realise and live by the fact that cash is king.
Everything in your business is about generating cash. It’s about producing turnover at the right price, maximising your profit by controlling your costs and then turning that profit into cash as quickly and effectively as possible.
This book will teach you exactly how to do that. If you have a business that’s already trading, then this is the first thing you should do to improve your business.
Forget trying to grow your business for now; first you need to get in control of your costs and cash flow. Otherwise you could be one of the many businesses that fail because they grew too quickly.
The Building Company …
I once had a client who came to me suffering from a case of turnover vanity. They were a high-end new home builder who worked with clients to build one-off luxury homes.
They were no-expense-spared beautiful homes that were amazing. The problem was that the business had grown rapidly with a massive increase in the number of projects on the go at any time.
Now, you could look from the outside and think:
“Wow, look at the business. It’s grown so rapidly. What a success.”
In fact, many businesses win awards based on this type of growth. But you guessed it; when you look at the numbers they weren’t successful at all.
They had grown before they had any control over costs or their cash. They had all the symptoms of a business that had grown too quickly.
- Job costs were blowing out, ending up costing more than budgeted, reducing their profit on each job and often losing money on jobs.
- They struggled to keep up with the work and had no choice but to employ new people without having the proper systems in place to make sure they worked effectively, massively increasing their fixed costs in wages and office space.
- And they had no control over their cash flow, living day by day, constantly struggling to meet their payments.
Without the right controls in place they couldn’t see that there was a problem until it was too late. The business was growing rapidly and everyone was really busy. All the owners saw was what a lot of people are duped into seeing:
“We must be successful. Look at how big our turnover is.”
The problems didn’t start to show themselves until cash started to run out. They started to struggle to pay the wages and meet the supplier payments. Still thinking they had a great business, they ignored the cash flow issue just thinking it was a short-term problem that would sort itself out once the next job was finished.
Slowly over time, the lack of cash started to strangle the business and bills became harder and harder to pay. The owners started to borrow personally and pour more and more money into the business to cover the shortfall until eventually they couldn’t borrow any more.
Now I’d love to be able to tell you how they turned it around, but by the time they came to me it was already too late.
Too often business owners don’t want to face the facts and live in denial. They see growth as the solution and focus everything on that. That’s a myth; growth, without the proper controls in place, can be suicide for a business.
They had to go through the painful experience of closing the business down and losing pretty much everything. We managed to save some of their assets but they lost a lot. They now understand what went wrong and how to do it better next time, but it was a very expensive lesson.
Most business coaches and consultants will only tell you about their success stories but so often we actually learn more from failure. Some businesses are just too far gone to save or just aren’t worth saving; that’s just a fact of life. To pretend otherwise is false. Allow this to be your lesson. Sometimes there just isn’t a magic cure.
At the end, the clients’ said:
“If only we’d faced this earlier and got you in sooner! We may have been able to turn this around.”
Allow this to be your lesson so you don’t have to pay such a steep price in your business. Don’t let that happen to you! Make sure you have the right control over your profit and cash. Don’t suffer from turnover vanity and always remember …
Turnover’s vanity, profit’s sanity, but cash is king!!!
I hope you found this part of my new book useful and that this has given you a bit of an overview of why your numbers are important.
If you would like any help or would like to discuss this further, please get in contact. As a reader of this blog I’m happy to offer you a free test drive of coaching. This is a face-to-face session with myself to look at your business and review your figures.