Last week during my first meeting with a new client, my client stated "I must be making a lot of money right now, as I am just always busy working". I followed up his comment with a series of curious questions such as how does he typically find out he's making profit each month, whether he knows at any point in time how much excess cash he has in his business to hire more employees or invest in a lucrative investment and whether he manages his unused cash to grow his profits. The client was intriqued by our conversation and we both knew we were on a path to creating additional value for my client's business that he - to that point - didn't tap into.
This situation is a great example of an etrepreneur who is turning profit and is one of the best performing entrepreneurs amongst his competitors, however is not necesarily managing his cash and efficiencies to the fullest.
With an implementation of few key value adding processes, the client's business performance and value will see a huge increase. Having cash flow and profitability visibility will allow this business to forecast, plan and utilize their cash (through investments in his business or external), and also plan for eventual shortages. But also, fine-tuning his operations and improving his processes will allow his business to grow in value.
Without looking into your fridge every morning, you wouldn't know if you need to go grocery shopping that day or if you have enough food to make dinner that night.
The same goes for your business - not knowing how much cash and profit you have each day or week (and in coming months!) will leave your excess cash un-utilized (as you could have invested it in your own business or outside) or will put your business under lots of liquidity pressure (if you have shortage). Visibility to cash and profit in your business on a daily/weekly basis is a must.
I recommend using business dashboards. Visually pleasing, without stacks of pages filled with numbers, dashboards give you the ability to get key information with a click of a button (laptop or mobile friendly), with the ability to drill down into details, should you chose to do so. Currently there are many alternatives in the market that were not available 5-10 years ago and they will give your business a huge benefit. Trust me, you'll sleep better at night if you know where your money stands.
2. Working a lot doesn't mean you are making profit.
Now that we've established visibility into your current and future cash flow and profitability (point 1 above), it's time to look at how you utilize your resources. How much you spend on your resources and how many resources you use to deliver a final product to your customer gives you the insight into your effectiveness.
The analysis of the most finite resource - your time - is a good way to get started on increasing output out of the time you spend running your business. Time is the scarcest resource you have. Where you allocate time changes everything in your business:
What activities in your day provide your business with the most Return on Investment (ROI)?
What activities are value adding to your business (in a form of profit, sales closed, new customers reached etc) and what activities can be automated, outsourced, changed or stopped?
Track what you spend your time on each day and whether it is important to you and value adding to your business. Just like writing a journal of what you eat helps you identify how to improve your diet and health, writing a journal of how you spend your time (for a week or two) will help you understand what activities bring you most return on your investment, what activities you should engage in, change, automate or stop.
Yours in business,
Lenka Bolton, CPA, CMA