Financial foundations for successful business

by Kate on October 4, 2010

Starting a business is difficult. One moment you’re wondering how to make enough money to pay the bills, the next you’re so busy you don’t have time to eat!

Life is a series of problems which must be confronted and solved – and business is no different. For many business owners, especially in the early stages, the question of how to generate enough cash to pay the bills is one of the things that keeps them up at night.

In his book, Predictable Success, Les McKeown identifies the first stage of establishing a business as Early Struggle. The struggle is to get the operational details worked out, obtain a consistent flow of customers, get your pricing right – and to reach the point where ‘cash in’ exceeds ‘cash out’ on a regular basis. He points out that every business faces this struggle and to succeed must get through and out of it.

In the early stages many people are tempted to ignore financial basics such as keeping up to date accounts and monitoring cash flow. After all, it’s clear cash is tight, there is no profit (yet) and you don’t need a P&L to tell you this. However, this can lead to a financial management roller-coaster; one day driving sales, the next fretting about credit limits, quibbling about expenses or trimming back on stock to save cash.

Ignoring the financial realities does not make the situation better. Indeed, not knowing what’s happening can make you more anxious.

Having a budget, up to date accounts and knowing what cash is needed each week puts you in control. These foundation stones can free you from the worry that comes from not knowing where you are and allows you to focus on taking action to reach your destination.

Here’s a reminder of some basics, and though they won’t completely take away the sleepless nights, they will help you get through the struggle quicker and reach the point where cash in exceeds cash out:

  • A realistic budget and cash flow forecast: This gives you something to compare your results with – a financial map and your best guess at the territory you will navigate. Even if you ‘know’ your sales goals and costs it’s too easy to lose focus unless they are written down.
  • Daily and weekly sales activity targets: Depending on your business, monitor things like number of sales calls made, number of inquiries, people through the door, or number of transactions and then focus your attention on improving your results in these areas.
  • A list of your weekly bills and payments due: This gives you the sales and cash receipts targets that you must achieve so you can stop drawing on your reserves. Even if you have more expenses than income don’t be discouraged or stop keeping track. It might seem surprising, but for most people simply knowing what cash is needed helps them stay focused on building sales and receipts and eventually those goals are reached.
  • A monthly P&L and balance sheet: This might cost a bit of money to set up with a bookkeeper or accountant, but it will save you in the long run. Once you’ve been in business two or three months, review your results against the budget and decide what adjustments are necessary to keep you moving towards your targets. Bear in mind that it’s quite normal to be a little ‘off target’, the point of your accounts and budget is to help you know where you are and adjust to reach your goal.

How did you get through the early struggle to build a financially stable business? Please share your experiences.

{ 1 comment… read it below or add one }

1 Glenn Walford October 5, 2010 at 9:44 am

Great post Kate!
A dose of reality is critical and staying close to that especially in these early struggle stages is so important as doing so sets up good robust financial habits required to take that business to the next level and beyond.
Agree, just following a few simple procedures consistently keeps this whole process nice and tight.
Keep it coming !
Glenn

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