I’ve worked with many farmers and food business owners over the years who come to me feeling stuck. Sometimes these people wonder why they are making a profit but are always strapped for cash. Others tell me they are drowning under quarterly losses or that the bank won’t give them the financing they need to operate.
The problem is many of these people aren’t focused on the financial side of their business, so they can’t see what they can do to the fix the situation.
Good financials are good for your business, and good for you.
Not investing enough in good record keeping, financial reporting, and inventory management, receivable and payables management means you will not have all the information you need to run and grow your business. It can lead to expensive mistakes, too. I know a lot of business owners who were not able to seize an important growth opportunity or who turned to overly expensive financing because they were lacking basic financial information about their business.
If your financial systems and reporting are incomplete and disorganized it will end up costing your business.
Here are five big costs of poor financials:
- You have no clear direction. Having poor financials is like driving in the dark without headlights—chances are you won’t get to where you wanted to go. There is no real road map, and you may have little idea as to what you even want to accomplish along the way. Financial management and day-to-day operational management go together. When you start making business decisions with little regard to the financial consequences- when you don’t see the connection between what you do and the bottom line- that’s when your business will get off course.
- It’s hard to make objective business decisions. When the financial side of the business is out of control, it leads to shoot from the hip decisions. You start managing today’s crisis at the expense of the future. If you are not properly tracking costs or determining what products are profitable, you won’t be able to effectively adjust prices, manage your inventory, pay your bills, or even set your employee work schedule. Even if you are an expert in the technical aspects of your business, it alone is not enough to help you determine the health of your company and your decisions must reflect the true health of your business. What is good for a healthy person may not be good for someone who is ill and trying to recover. The same is true for a business.
- You are always scrambling for cash on hand. I’ve met many farmers and food business owners who were generating healthy sales, but never seemed to have enough money on hand for the daily expenses. Whenever a shortfall comes up, they immediately start scrambling, looking for ways bring in more sales, cut costs or stretch their vendors. But a lot of times this backfires. At KTC, we’ve helped many business owners unlock thousands of dollars simply by looking at the way bills are paid, payments are collected and under used assets are used efficiently. Sometimes the problem is that money is sitting in unused inventory or equipment. If you are not paying attention to how the money is coming in and going out of your business, then it is easy to miss these cash cows.
- You are not able to borrow money. While a community bank, credit union, or local lender may be sympathetic to your situation, you can’t expect them to just blindly hand over money. When it’s done properly, your financials tell the story of your business, and 80% of the battle to get a lender to finance you is how you tell that story. Without knowing why they are getting rejected, some frustrated business owners turn to expensive alternative financing arrangements, like factoring and business cash advances. While they may end up with money, the higher cost of debt can gut their business.
- You will be physically drained. Because they are out of touch with how to make a profit, some business owners waste a lot of time and energy running around- to pay the bills, collect payments, and expand the business. But all of this running around means they have less time and energy to direct to both their daily operations and their long-term goals.
Your most useful tool, your secret weapon.
Not only do you need to set up the right accounting systems, but your financial reporting should be used as a tool to understand the overall health of your business and to pick out key trends. In short, it should be your most valuable, well used tool on the farm. Once you are in touch with the financial side of your business, you will have the information you need to handle setbacks, secure financing, and find the best opportunities for sustainable growth.
Your financials should tell you (and your team) the story of how you make money and then you can decided how much money you want to make.
We love you, but stop using your accounting systems to show your creativity and uniqueness. Keep it boring and simple, there is enough to worry about.
Do I have your attention? Does this feel like you? You are not alone. We see this in our work every day, we have been there ourselves. I could write a whole book on the solution to these issues if I had the darn patience, but at the end of the day there are really just six steps:
- Simplify your chart of accounts. Seriously, your business is not special (well, it probably is special) and unique requiring a complicated chart of accounts, so knock it off. Click here to see KTC’s simplified chart of accounts.
- Set up a simple review process you follow every. single. month.
- Set a schedule. Make time every week to manage the process, I do it every Sunday morning from 6 – 8am, when nothing else is bothering me because no one else is up.
- Cash is King. Collect your cash. No really, pay attention to receivables. Click here to see KTC’s “sand in your shoe” receivables process. Click here for our 13 week rolling cashflow template to forecast your cash.
- Review trends and compare numbers. Do a monthly formal review process. Study trends. Make notes and keep them to compare next month, nothing fancy but you should note what you see. Your goal is to suck less each month. Compare this month to the last three months. Compare this year to date to last year to date. Each month, look for that one area you can improve on and then focus on that. Trust me, you cannot do it all at once, and that is okay.
- Just do it, now.
Start now and don’t stop. How do you eat an elephant– one bite at a time.
Ted LeBow
