This blog is posted in conjunction with our recently released Podcast #127 – Interview Special.
Wouldn’t it be nice to wake up one morning and find that the turnover of your business had increased by 10% or more? Or if you opened a drawer in your desk and found thousands of dollars that you never knew you had?
Most of us have had these fantasies – especially late at night when going through our books for the umpteenth time in a vain attempt to find the cash we need to pay our bills.
Yet most businesses have more money than they realise.
It is simply locked up in overdue debts, inefficient banking arrangements, initial capitalisation structures that do not reflect the real needs of the business, underutilised assets, long lead times in bringing a product to market, poor stock management, overgenerous credit, and a hundred other manifestations of weak financial management.
In some cases this extra cash might be a significant percentage of turnover – perhaps thousands or tens of thousands or even hundreds of thousands. It may be the difference between success and failure.
Some businesses fail because they are flawed conceptually from the outset, but just as many, perhaps even more, fail because they experience a cash flow crisis. These cash flow failures are particularly tragic because most of them are avoidable: the basic concept of the business might have been sound and, given proper management, it might have been a success.
Those responsible for the failures usually blame adverse circumstances. In fact, their continued inability to admit they are responsible is itself a symptom of the real cause of the failure. Put bluntly, the head of a business is responsible ultimately for all aspects of its management, including its financial management, and if he allows an avoidable cash flow crisis to develop, he has only himself to blame.
It might sound insane to suggest it but most entrepreneurs are not particularly interested in money. They need to be interested in the making of money and some –albeit by no means all – are also very interested in the spending of money, but money itself, and the flow of it, can bore them.
This is understandable. The main focus of a real entrepreneur is usually – and quite rightly – on sales. If the entrepreneur feels that he is selling well, it is all too easy for him to assume that the money from these sales is flowing smoothly into his bank account. He carries on selling, leaving it to his book-keeper and his accountant to deal with the tedious paperwork.
Of course, it is significant that a disproportionate number of successful entrepreneurs have a background in accountancy or financial management, and a disproportionate number of general practice accountants, whose clients are small businesses, have an entrepreneurial streak of their own. Yet is still a solid generalisation – and therefore subject to exceptions on both sides but still more often true than not – that the training and temperament that make a good accountant are very different from the ideal characteristics of an entrepreneur.
It is possible to combine them, but doing so successfully is rare, because they tend to be associated with different personality types.
None of this exempts the entrepreneur from responsibility for the overall financial management of his business. He should make sure he has the best possible financial advice – and he must listen to it. His accountant should keep a close eye on his book-keeper and he should keep a close eye on his accountant. If that is not enough, as his business grows, he should be brave enough to appoint non-executive directors to keep an eye on himself. No one in the process should be afraid to ask hard questions.
If that this sounds rather daunting, here is the good news: financial management can be fun. It can become addictive as you get used to it. It is surprising how even those with a poor education can come to enjoy doing sums when they refer to their own earnings – and how expert they can become as a result.