Risk and missed opportunity lie ahead if you don't have a grasp of your finances
Despite the fundamental importance of healthy finances, a surprising number of business leaders and founders don’t have an accurate understanding of the financial health of their company.
Not knowing where your business is when it comes to finance, is one of the riskiest positions to be in. Yet many leaders don’t even realise they are in this
situation,thinking they have a handle on the key numbers only to get a surprise when things take an unexpected turn.
If you don’t know precisely where you are, how can you navigate to where you want be?
Misreading the figures
The most frequent mistake made when it comes to finance is focusing solely on today’s bank balance. That figure alone, without context, reveals almost nothing. You may have cash in the bank, but if your monthly outgoings on everything from wages to rent to paying suppliers is substantial you may have a problem. And that’s not even factoring in unexpected costs or supply or service issues.
Technology can play a part too. Accounting software like Xero are fantastic tools and really help with understanding your finances. But you need to have the expertise to use them effectively.
If you are primarily using these platforms for book-keeping, rather than robust management information, you are still travelling blind.
Two kinds of ignorance
Not knowing the state of your finances is of course dangerous for all businesses. But there are different risks for those who know they don’t have a grasp on their figures and those that think they do, but are mistaken.
1) If you think your financials are healthier than they really are, you risk:
• Making investment or cost decisions you can’t afford
• Running out of cash
Both of the above scenarios can put your business under severe financial pressure and lead to reactive cost cutting measures, including letting people go. To combat such fallouts, you may have to raise emergency funding, which is hard to get and expensive. Furthermore, potential investors or buyers further down the road will find these lending patterns in their due diligence, which could affect their confidence and decision to come onboard.
2) If you think your financials are worse than they really are, you risk:
• Missing out on opportunities to invest and drive growth
• Failing to grow due to inertia from a false fear of running out of cash.
It takes money to make money. If you aren’t aware you have a healthy reserve to tap into and move forward with, you are needlessly falling off the pace and taking the momentum out of your growth journey. It’s wise to have money in reserve, but there comes a point when stockpiling funds is simply storing up wasted opportunity.
Back to basics
If you aren’t confident in the numbers, stop, take stock and rework how you operate. If you do nothing else, focus on cash.
What have you got now? What are you likely to have coming in? What is the gap you need to bridge if there is a discrepancy between the two or if you want to expand? Look forward, not just over your shoulder.
We recently spoke to an organisation on the verge of launching some new products. They were confident they had the funds behind them to do so, but on the eve of launching they realised they had a false understanding of their finances and were running out of cash.
We sat down with them and plotted out, for the coming two months, a daily list of what was coming in and what was going out. That way we were able to identify potential and actual issues and how they could rework things to allow them to manage their cash flow naturally and meet their commitments.
Where needed, they were able to talk with bigger suppliers to shift payment options around and they were soon back on track. The key to their recovery was they focused on cashflow on a daily basis. Cash was first and foremost in their minds. Later, when they decided to go for funding, their new rigorous approach to the numbers worked in their favour, helping them win investment and allowing them to launch their new products.
It’s a numbers game
No matter how strong your product or how first-class your service, it’s the numbers that will ultimately set you free or hold you back.
Ask yourself, could you confidently discuss the financial situation of your business in detail to an investor or bank manager asking tough questions? Do you know where your finances were yesterday, where they are today and where they will be tomorrow? If not, you need to get back to basics. It’s too costly a thing to get wrong.
Many founders have a fear of, or lack of interest in the numbers. Learn to embrace them and your business will benefit enormously.
If you would like to learn more about getting your financial planning right for your company, drop us a line at enquiries@valuemakeruk.com