Archives#planyourwaytoprofits Archives — C. Lynn Northrup, CPA, CPIM
We’ve just finished up paying our taxes for the year. Maybe you had to pay more than you wanted and had to scramble to come up with enough cash for the payment. You might have looked at the numbers and wondered why we didn’t do better. There could be lots of scenarios to the story.
Reality is that many businesses don’t really know how they are doing and wonder how they can do better. This is an all too familiar theme for most small businesses. It is essential for businesses to take time to consider their options.
Here’s some signals that maybe your business could use some help:
- Gross margins have decreased.
- You can’t identify your product margins.
- Profit margins are too low.
- Your cost structure is out of line with the competition.
- You’re borrowing too much.
- You have declining trends over the past few months.
Maybe you need a tune-up:
- Has income declined over the last three quarters/
- Are sales declining?
- Are you satisfied with your overall results?
- Do you have a plan to maintain your rate of growth?
Here’s some signs that things need to turn around:
- Are you starting to lose money?
- Do you have too much inventory?
- Can you recruit new help?
- Do you have too much debt?
- Do you know where you are making profits?
- By customer
- By product or service
- Have you lost business to competitors?
Crisis questions might include:
- Can you meet payroll?
- Will the bank lend you more money?
- Have good employees quit?
- Have vendors stopped shipping goods to you?
- Have you had time to think and strategize?
- Have any of your customers who don’t pay on time stopped ordering?
Maybe you just think your business should be doing better and you don’t know why. Whatever the reasons, there are things every business should and could be doing to make things better. My blog post on Biggest Business Problems explains and discusses these issues.
The first thing businesses should do is step back to reflect on what you have done and where you want to go. Businesses fail to engage in “Strategic Thinking” and they fail to effectively “measure their performance” on a regular basis.
These are what I call the Management Tools for Success that are critical for growing and increasing profitability. Business owners need to spend the time and effort to learn about accounting and measurement. In addition, they need to then learn how to apply these tools to making their business more successful.
My goal is to provide business owners with the knowledge and tools they need to be successful. Take advantage of my consulting experience which are offered as resources for businesses on a subscription basis and as toolkits and checklists which can be downloaded from my store.
A good way to get started is with The Guide to Strategic Thinking and The Strategic Thinking Toolkit and creating a plan for Profit Enhancement. The key is doing something rather than just thinking about it. So go make it happen.
We have been offering weekly business tips and week 14 focused on management activities and they included the following:
- Create a vision for your business
- Select and define your market
- Select and define your service offerings
- Design an organizational structure
- Define the critical success factors
- Define the key performance indicators
- Prepare activity targets and cash flows
- Organize financial resources
- Prepare profit plans
Yes, all the above are management activities, but how many businesses do a good job of performing any of these activities or even perform all of them? When you assess the list of activities, you think, wow that’s a lot of work. Where do I start and how do I get my arms around all this effort?
The problem for many businesses is that they really don’t do a good job of focusing on any of these activities. As a result they wonder why they get into trouble and end up putting out fires. These management activities are called “working on” your business in contrast to “working in” your business. It starts with having a clear vision for your business and knowing where you want to go. This is the first step in the process and leads to development of the other activities. Without having a clear vision, it is impossible to do a good job of performing the other activities.
I think working on your vision for your business should be a never ending process. The more you focus on clarifying and developing your vision it will enhance the time and effort spent on the other activities. You’ll begin to develop a better idea about your market, your service (or product) offerings, and enhance the design of an effective organizational structure.
Understanding of the critical success factors for your business will have greater clarity and focus. This leads to more effective selection of performance indicators and creates a performance measurement system that will help guide you toward your true vision. Linked to performance measurement are activity targets, goals, and objectives.
Once good financial systems are in place, it makes it easier to effectively organize financial resources and develop accurate cash flow projections. Cash is the life blood of any business. While many businesses worry about cash flows, most of them fail to do a good job of managing it and developing accurate cash flow projections.
Finally, we get to the preparation of profit plans. Most businesses fail to create a solid foundation for developing reliable profit plans. For the most part I think businesses are winging it by putting projections together with a hope and a prayer rather than utilizing a planning system grounded on reliable data and assumptions.
So, fine tune your vision and one good action will lead to another. More importantly, set aside the time and the resources to perform these management activities. Learn to “work on” your business as opposed to “working in” your business. If you can achieve this level of focus, I think the results will speak for themselves.
Everyone and every business experiences times when things aren’t going well. You feel like you’re treading water. It is comparable to a sports team or an athlete that hits a slump. It’s a frustrating feeling. You feel like you need to be doing something but it seems like you’re going backwards or standing still. This is a normal situation that happens to everyone at one point or another. The big question is how to get things moving again in the right direction.
Here is what works for me. I am big on lists and notes. When I hit the wall, I sit down with a blank piece of paper and start making a list of all my thoughts and ideas. I try not to be in my office when making these lists to create neutral territory. I outline my thoughts and concepts without regard to whether they are good, bad, crazy or whatever. My next step is to brainstorm the list and expand on it where appropriate. This includes considering the pros and cons of each idea.
Another step is to research each idea that I feel might have some merit. This often leads to checking on what others are doing, especially competitors. During this process, I reflect on what’s working, what’s not, and why. Just engaging in this sort of activity often will jar loose new thoughts and ideas. Often an old idea turns out to be a good approach after a little tweaking.
I am careful not to allow any knee jerk or panic reactions. It is important not to overreact. Take some time and let things settle in and contemplate various possibilities. Also, this might also be a good time to take a break. You would be surprised how this can rejuvenate your thinking. All of a sudden fresh new thoughts and ideas pop into your head.
Often just checking your data and numbers can get you pointed in the right direction. Actually, all small businesses should be checking their numbers and trends each month. This process doesn’t need to take a lot of time. This could maybe take an hour each month. Having a virtual coach or CFO can be a great catalyst in performing this step and a source for some fresh ideas. This approach gives you feedback and an objective point of view.
I’m big on lists and to dos. It helps keep me from procrastinating and putting off things that need to be done now. Procrastinating will get you stuck every time. That’s where my lists and to dos provide the motivation needed to keep things moving. Writing things down helps to reinforce your ideas and concepts and keep your thought process active.
These are things that work for me to keep myself on track and from getting stuck. Hopefully they will be helpful to you as well. Give them a try and you might be surprised on what new thoughts and ideas come to light.
One of my students asked me to share advice and information on starting a business. After thinking about his request, I recalled a recent article posted on the Business Owners Zone. It is a must read for any person considering a new business venture and was posted by John Benson who successfully started a business and lived through the process.
I thought the most critical question in the article was “do you have a business plan?” A business plan will help to answer the question of whether you have enough money to start and grow the business. The article also touched on the psychological and emotions issues that should be addressed before launching a new venture.
Business coaches weren’t mentioned in Benson’s article but I think having one is a good idea. In a previous blog post I pointed out that business and life can be a lonely journey. Having an experienced coach can be the difference maker between success and failure.
Starting a new business requires serious research and analysis. Here are some questions to consider:
- Am I qualified to do this work?
- What is the cost to start this business?
- What resources do I have to commit to the business?
- What is the competition?
- How successful is the competition?
- Will I need help to run the business and can I get the help I need?
- Can I run the business from my home?
- Who can I talk to about starting this business?
- Do I need a business coach or advisor?
These are just a few areas you need to evaluate. Many other questions will emerge as you prepare to start your journey.
One of my other blog posts dealt with the flower exercise to help you understand your skill set to get a better handle on how well equipped you are to start and run a business. The self-examination process should be part of your homework before making a leap of faith into something that’s not a good fit.
If you make the decision to move forward and follow your dream you will need an expert financial advisor. I strongly recommend engaging a CFO advisor to help you set up a cloud based accounting system. This will provide the necessary financial tools to help manage your new business. Having a good accounting system and being linked to your own virtual CFO is an essential ingredient to success.
Your business coach together with a virtual CFO will help you craft a strategy and develop a business plan. These steps combined with a solid accounting system will give you the tools to measure and monitor your business results. Measurement is critical. If you can’t measure it, you can’t control it. If you can’t control it, you can’t manage it and improve it.