I’m finding that many of my clients are benefitting the most from Finance plans. Because I’m seeing a real need for this, I decided to include an excerpt from Chapter Six of my book The Synergy Factor on The Finance and Information Team:
Why 80% of All Businesses Fail to Make Enough Cash to Keep the Doors Open: A Lack of Financial Synergy is Key.
Profits are and always will be the number one concern of every Owner and Manager. In order to create and accurately track profits, several components must be in place, including budgets, profit plans, growth plans to obtain increased financial capabilities, cash flow plans, document control, conversion cycle of assets (turnover), terms of sales, accounts receivables, accounts payables, job profit analysis, product/service profit analysis, and personnel cost ratios, just to name a few. Understanding where profits and cash flow are coming from or not coming from is the purpose of having financial processes in place.
Happiness in business means having a positive cash flow. One of the main reasons for business failure is running out of cash. The challenge is that cash flow is not always easy to read. The first step to understanding cash flow is to set a cash flow objective for the month and year-end. Cash flow problems can often be avoided by developing a cash flow planning process, which includes the budget process, the accounts receivable process, and the work in progress process.
Realize that with every job, time delays have a cost. Jobs that drag on can create cash flow problems because they delay invoices going out on time and keep you from collecting your money fast enough. Additionally, when you don’t get advance deposits for every job, you slow your payables (using credit cards can help reduce immediate cash outlays). Inventory control processes can be critical as well. Excessive inventory or its mismanagement can cripple your cash flow.
Pricing processes are also critical to profit and maintaining a positive cash flow. Increased competition has put pressure on pricing, so simply raising prices to earn extra money won’t work in today’s business climate. That’s why profits and profit plans are a critical priority.
Successful business owners know they must manage customers for profits as well as sales. High sales volume does not necessarily mean high income, as many business owners have learned to their sorrow. It costs more to fill some orders than others; therefore, your pricing must reflect that difference. Too many owners and managers pay little attention to customer profitability. They give in to large accounts, as these accounts demand higher and higher discounts, more service, and longer terms, only to discover they have eroded profits and end up with losses. I have seen these same businesses raise prices to the so-called “worthless” accounts. While these small customers initially seem to be more trouble than they’re worth, the business owner ends up discovering that they actually made more money and received higher profits from these small customer orders.
Without a good cost accounting process there is no way a business can understand order, product, customer, or market segment profitability. Developing a pricing strategy includes shifting or changing the product, the customer group, the distribution channel, or the sales strategy. A business’s ability to raise pricing depends on the customers’ perceived value of the product or service versus their perceived value of the competitions’ product or service. Part of the perceived value includes the uniqueness of the product or the numbers of suppliers bidding on a typical order. Pricing is also an important component of the marketing function, as the more successfully you can market the product, the more you can ask for it.
The Lack of The Synergy Factor Can Drain Your Profits
While owners and managers believe they are paying attention to the most important expenses, it’s usually necessary for them to look deeper. They must focus instead on errors, ineffective processes, redos, low productivity, poor allocation of resources, slow capitol turnover, and old technology that is causing gaps. Most companies fail to identify and then to correct these problems fast enough.
Undetected financial errors routinely occur when employees and managers fail to fill out company forms completely or correctly. These kinds of errors cost businesses thousands of dollars in lost profits each year.
Ineffective processes occur when companies fail to take the time to document and measure the correct way to do an important key financial process. The lack of effective financial processes costs most companies thousands of dollars in lost profits each year. Specifically, a study by G.E. has proven that many businesses are spending somewhere between 10% and 40% of profits on redo work alone. This is the subject of Six Sigma, a business process that focuses on redos as the biggest single killer of a business’s profits.
People can work very hard and believe they are doing things well enough, but my experience has proven this thinking to be a fatal flaw. In fact, the major cause for lost profits is that the owners and managers are too busy working in one or more jobs rather than with the teams and the process maps to correct these profit killing problems. Additionally, most owners and managers don’t know what to do because they simply haven’t seen a better way.
However, all the processes we’ve talked about to this point have a direct impact on the financial result of a business. For example:
- If sales don’t increase, profits can’t increase.
- If management can’t keep, recruit, and train increasing numbers of quality people, profits can’t increase.
- If operations doesn’t create a satisfied customer, profits can’t increase.
Below are the 10 main reasons for profit decline. Management’s job is to focus on creating and measuring all the necessary processes required to change each of the reasons listed:
10 Main Reasons for Profit Decline:
- Don’t control costs, including redos and errors.
- Disregard or misinterpret financial data and fail to share this information.
- Keep inadequate records, especially regarding time and material costs of critical jobs.
- Fail to market aggressively.
- Lack of proper strategic planning.
- Fail to develop processes to improve results.
- Fail to have an effective human resources strategy, including recruiting, selecting, incentives, mentoring, and training employees.
- Have insufficient working capital.
- Do not seek experienced help when necessary.
- Place blame towards others rather than create a process to stop any pattern of errors from recurring.
If you would like to learn more, including the 10 Rules to Increase Profits, you can buy my book on Amazon here. If you would like help getting your Financial plans in order, email me or call me at 989-791-2475 and ask for Gary.
As always, your comments and shares via social media are greatly appreciated!