Advice for any Business Owner on Financials
More than once, you've likely said to yourself, “if I had only known then what I know now.”
I recently had this discussion with regards to starting and running a business with a group of business owners of various size and experience. The answers were so pragmatic, direct, and spot-on, I feel compelled to share for all to benefit.
The result is a list of 20 different pieces of advice, spanning five different areas. Too much for one article. So, I’ve broken them into the following general areas and will send them out one by one over the coming days.
Part 1: Personal Development
Part 2: Financials
Part 3: People
As you read this, I am curious, what would be on your list?
Part 2: Financials
- Be careful with debt.
Everyone brings a philosophy and comfort level to the table with debt—everything from OPP (other people’s money) to DHA (don’t have any!). There is no one right way. It is an individual decision based on your risk profile.
Debt can be a useful way to start or grow your business, but things can turn ugly without proper mindfulness, planning, and care.
Critical is understanding whether the debt you are taking on is productive (working for you) or non-productive (working against you) and how much of it you can afford.
Productive debt is a debt from which your company can benefit. Proper use can help you lower financing costs (vs. giving equity), create leverage, create capacity and productivity gains, as well as help with tax savings. If you borrow money to finance items that aren’t returning money, time, capacity, or productivity – promptly – then it is unproductive.
- Learn and understand cash flow.
There are plenty of insights available to strengthen your knowledge and comfort in the area of cash flow.
Knowing what cash you have, what is coming in and when, and the patterns of your business’ cash inflow and outflow are CRITICAL and the most important thing to understand at all times fully.
In my past, the practice I was a partner in used a term called “the wolf” to indicate how long we could run the business - as is - with cash on hand and expected if we were to generate no new revenue. The “wolf” was an essential indicator of the firm’s current health and critical to decision making around timing for investment, debt, bringing in money faster, and other things when necessary.
Without knowledge and understanding of cash flow, you run the risk of business tragedy.
Bottom line - master this skill if you have not already.
- Know your #’s.
Numbers are the language of business. Your complete understanding of them will positively or negatively impact everything you do short and long term.
Knowing how to leverage your numbers, their relation to each other, and how each drives performance and the value of your business will allow you to make better decisions, grow your firm, reduce risk, and most importantly, create leverage for you and free up future options and possibilities.
Identify the critical leading drivers in your business, along with the crucial lagging indicators of health. Visit with your numbers often.
Understanding what indicators matter internally and externally will help you ask better questions, make smarter decisions, build a healthier business, and - ultimately - create the flexibility and freedom you want that likely led you to start your business in the first place!