When running a business, the numbers are important. It may not be the most important factor because it is more back-end rather than front-line, but there needs to be a sufficient balance with one eye on the financial performance and another eye on the market and business end of things.
Many people go into business because they pursue something they are passionate about and good at. They are often pretty good sales people because one of the most important aspects of the early stages of the business are to be able to sell your idea, gain buy-in on all levels, and to be able to get customers for your product or service. A lot of this involves building relationship, networks and rapport with those around you in the relevant industry.
However, you will find that many sales people dislike administrative tasks and working out the numbers. They tend to be relatively uninterested in following proper processes, documentation, and often submit the paperwork for their sales wrongly, unless it is part of their claims or commission (of which they do very well). And in many corporate companies, this is acceptable as long as they bring in the sales.
But this is not a luxury that entrepreneurs and business owners have. Although a large part of their time will be spent with people, bringing in the sales and servicing clients, they need to always keep tabs of the financial position of the company, especially in a small start up.
And the numbers that you look at and focus on are different depending on the nature of the business such as whether it provides products or services, and whether it is a cash business or allows lines of credit for periods of time.
If you're a product provider, you may focus on gross profit meaning revenue minus cost of goods sold in order to make decisions. If you're a cash business providing a service, you may just focus on net profit because you don't have a cost of goods sold to deduct off and since you operate with cash, there are no issues with cash flow.
In my current side business (which is a service-oriented business which does not receive up front cash payments), I've come to realise that the most important area to focus on is operational cash flow. It is the lifeblood of the company and as long as it stays positive month in, month out, we're in good shape to build it up. Not to say that the other areas are not important but the health of the company is based on whether the cash collected each month is more than the operational cost of running the business.
This is different from what most people emphasise: profits. Even in the media, the focus is constantly on the profits of a business but any accountant would know that these profit numbers can be played around with and dressed up. Some companies even go to the extent of issuing false or unconfirmed invoices to boost their profits.
I believe that the rubber meets the road when it comes to operational cash flow. There's a lot less room to pretty up the numbers - it comes down to whether you can collect enough cash to pay your expenses, and whether you even have any left over after you do that.
I've heard of so many situations where a business got an unexpected, large project, got extremely excited, started recruiting quickly and expanding in order to handle the wonderful project. Then suddenly, the operating expenses shoot up and you may not get paid throughout the progress of the project until the end, or sometimes only 30% upfront. And then just when you think the money is going to roll in at the end of the project, you end up chasing people for months for their payment, and these people start playing games, telling stories and negotiating for repayment terms and more time.
Suddenly, the pipe dream of that big project with the possibilities of grandeur begin to fade only to be replaced by bankruptcy procedures, even though on paper, the profits are still very good.
Decisions need to be made with cash flow in mind. Revenue and sales are very important. Keeping expenses down is important. Having operational efficiency is important. Reducing liabilities and increasing assets is important.
But, for me, cash flow is the red blood that needs to keep pumping throughout the body of an organisation bringing positive oxygen to keep the different body parts moving at an optimum level all the time. Keeping it in mind and hitting your cash flow targets mean that you are hitting enough revenues to have sufficient collections, and that you are keeping expenses at a reasonable level.
A cash flow mindset allows you to make a balanced decision that is not too risky and at the same time not too conservative.
(But I have to admit that I'm a lot less risk-taking than most entrepreneurs out there...)
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