Rely on information not guesswork or intuition to manage your business, says CRAIG RATTRAY
Many entrepreneurs and company owners rely on guesswork and their intuition to determine whether they have had a good day, week or month in their business. We have been really busy; we have had 60 men on site; all of our equipment is out on hire. I have heard these explanations, and more.
As the business owner may be close to things operationally these instinctive reasons can occasionally correspond with the actual performance. But more often than not, it bears no resemblance to the cash position and the financial performance of the business.
It is not an effective way to manage your business.
Activity does not equal profit, and it certainly does not mean significant net cash inflows. Key financial and strategic decisions should not be made based on guesswork, instinct or hope.
How can effective and appropriate decisions be made without knowing the trading performance and the full financial picture?
Answer – it can’t.
Effective financial systems are key for managing financial performance and working capital. They are also important with respect to company valuation and finance raising.
With the right financial information, we can establish:
- where you are – current management accounts and information, plus an up-to-date bank position
- where you have been – historic management accounts and full year final accounts
- where you are going – forecasts comprising monthly profit and loss, balance sheet and cash flow as well as a weekly rolling cash flow forecast
Looking forward is key for me. However, to move forward we must know where we are now.
Think of a map for a journey.
To reach the destination we must have a starting point and an intended direction of travel, as well as fuel for the journey.
Relating this to financial management:
- The management accounts are your staring point.
- The forecasts are your intended direction of travel
- Cash (and/or suitable working capital facilities) is the fuel to get you there.
This reminded me of a business owner I met more than ten years ago.
His first comment to me was “I don’t believe the numbers my FD produces”. He was close to the business and in this situation, he was partly correct because the numbers the FD produced were wrong, but they were not in line with the MD’s intuition. By working with the business owner and his operational team we created the information they required to evaluate and measure performance going forward, and to make key decisions.
In addition, we created daily, weekly and monthly Key Performance Indicators that measured performance, profitability and cashflow.
Using this information, in the next twelve months the business increased turnover by 50%, doubled profitability and raised a substantial eight figure sum in new finance facilities.
As a result of the new systems and revamped financial infrastructure, the MD could tell quite clearly every day, every week and every month how the business had performed. It also gave him insight into future performance and allowed him to manage the growth towards a profitable exit.
Just good effective financial management.
Trust me. It definitely works and can make a huge difference to performance.
Put it in place, and you can stop guessing, manage your business effectively and drive performance.
Craig Alexander Rattray’s column on issues affecting owner managers appears on alternate Mondays