Business owners like yourself need to keep your costs at a minimum, especially during the first few years of business operations, but accounting is a necessity you can afford. Almost 75 percent of small businesses in the U.S. don’t have accounting help, and all companies that ultimately fail comes down to one thing, operating cash flow. It’s easy to ignore your accounting today, but if you continue, it will catch up to your business, this article will explain how an accounting service can help turn things around.
Accounting is complex, and the only winning strategy is the one we adopt here at Anguiano Consulting, welcome audits. If your accounting ledgers are structured, you have nothing to worry about in the case of a review, the only ones who should be afraid are the ones who haven’t implemented a structure. Most business owners fear the IRS because of one fatal mistake, mixing personal and business funds.
When we put things on the back-burner, we allow the problem to build up. Bank fees happen when our account gets overdrawn, but with a solid CFO, your account shouldn’t incur any unnecessary fees. Accounting can help you plan for future payments. Accounting is the process of taking your business activities on a daily, weekly, and monthly basis and translating them to numbers.
When the IRS audits your records, they’re translating these numbers back into business activities, business activities that should align with the IRS guidelines. The IRS guidelines are mostly rules that business should follow.
If you feel inexperienced in translating this language, you’re not alone. In the beginning, we often handle multiple business roles ourselves. However, after a particular time, we must entertain the idea of hiring an expert. When you speak with an expert for the first time, a floodgate of knowledge will open to you.
Experts spend all their time doing what you do for a few hours a week. You gain two things with the help of an expert, time, and a more in-depth knowledge or understanding to apply to your business. Without these things, you can’t grow. Successful businesses have a deep understanding of their financial numbers. Accounting should become a necessity in your industry.
Necessities and luxuries
Necessities and luxuries are the same as wants and needs. In budget daily, budget often Rosa covers the basics and what we need. Our requirements for survival are natural food, clothing, and shelter. On the other side of the spectrum, human wants are infinite. The need to seek pleasure for the sake of pleasure is an addiction.
Businesses that fail to distinguish between the two will end up with negative operating cash flow and outstanding bills to pay. It’s easy to count something as an asset instead of a luxury, but just because it’s justifiable doesn’t mean it’s correct. The more we mix the two, the harder it is to distinguish between what your business needs and what you want.
I’ll give you a scenario. You walk into Best Buy because you need a business laptop. Fair enough, if your customers are online, you need a way to reach them. If you need to do administrative work, you’ll need a computer. When you walk into the store, you find a $400 laptop that meets all the requirements you’ll need to complete the work.
But something shiny catches your eye (you might know this as shiny object syndrome), it’s a brand new Mac with all the latest specifications. It has a built-in webcam 2.4GHz quad-core Intel Core i5, 512GB, a state of the art graphics card, and a sleek, customizable finish. All for the price of $2,000.
Which laptop did you choose?
I’m sure you said, “The $400 laptop, of course.” But in reality, many of you would have walked away with the $2,000 laptop. The $400 was good enough. It had everything you needed, anything past that was a luxury. Luxuries add up to expenses, and expenses are a black hole your business doesn’t need.
The power of metrics
Darren Hardy said, “You’re not serious about something until you measure it.” Darren Hardy is a performance coach, CEO advisor, and former publisher and CEO of SUCCESS magazine. The power of metrics shows us where our business stands and the direction it’s going.
If you plan on selling your business, how would you calculate it’s worth? If your business is profiting four million a year, you can only sell it for four million. In reality, that’s what your business is worth.
Metrics can help or hurt you if you measure to improve, then your performance will increase over time, but if you’re improving the wrong metric, it won’t help your business.
Imagine you wanted to train for a marathon, but instead of tracking your speed or distance, you tracked the amount of muscle mass you gained. Slowly you ingest more calories to meet your goals, and over time, you gain muscle mass. Although you’re hitting your performance metrics, are they helping you train for your overall goal, a marathon?
Now imagine you’re doing the same thing in your business. When we aren’t sure what to measure, we aren’t confident where we’re going. If your focus is on the wrong metric, your business won’t generate the income to scale. The power of metrics shows us where to shift our attention to get the most out of our growth.
What gets done in business
The only work that gets done in business is what gets measured, from employment to profit growth, and even the goals you’ve reached are written down. But understanding what the numbers mean is another matter.
We can take vitals, all day, but unless you’ve been trained to analyze what they mean, a resting heart rate of sixty beats per minute probably means little to you. What gets done in business is what gets measured and what is understood.
The business owners that fail are invariably the ones who can’t understand their numbers, without understanding the KPIs and critical drivers, there is no hope for success. In this article, I am going to break down the measurements you should be focused on and how they’ll impact your business.
The difference between KPIs and critical drivers, KPIs are important to measure, but only critical drivers can permanently level up your business mentality. KPIs can be found in sales, accounting, and marketing, but the critical driver is what needs to be done to result in KPIs. Some critical drivers are making cold calls to prospective clients, or maybe you call the customers who didn’t want to do business with you, talk to them, and thank them for their time.
The number of team meetings you have that focus on moral and building culture can extremely improve your business. The number of sales calls you to make or the amount of direct outreach you complete.
These are critical drivers and critical drivers can take your business to the next level.
Business revenue is the money or cash equivalent your business can collect from normal operations. Your revenue directly reflects how effectively you, as the business owner, can manage your assets. Whether your assets are a sales team, product, or you, your revenue reflects it. If you find your revenue suffering, the first thing we look at is how you’re managing your assets.
Are you assets producing revenue, or have they turned into an expense?
If your assets aren’t producing revenue, your investment has turned into an expense, and you’re leaking money. If a business can’t make money off the assets it has, it won’t continue to operate, without operating cash, your business is as good as done.
Assets can be trained, shifted, reorganized, and redeployed. The only limit is you.
What got you here won’t get you there,
if it could get you there, you would already be there,
and it hasn’t, so it won’t. -Keith Cunningham
Every problem we encounter is an opportunity for us to test and grow ourselves, you will face new problems every time your business grows. The key is not to fear these challenges but to embrace them because, on the other side of that wall, your business revenue grows.
If your business revenue isn’t growing, you only have the asset manager to blame you. But if you understand your metrics, you can adjust, invest in the asset and enjoy the positive growth.
Business profits are the remainder after costs, and expenses get deducted from total revenue. Your profit reflects how efficiently you as the business owner can manage your revenue. Everything in business is connected in some way, and we have the data to measure it.
In business, there are costs, expenses, and investments.
Costs and expenses are what we should strive to eliminate from our business. The only thing that matters is investments, the investments you make pay off, or they don’t. Acquiring new assets is an investment if the outcome is more revenue, but if the outcome is lower revenue, your new assets became a bad investment, and you pay the cost. Cost is what you pay for bad investments.
A profit loss statement or income statement is a valuable tool to drive your business to success.
Expenses are something that can and should be entirely avoided especially personal expenses. Your money is an investment that will help you scale and grow. The reason most businesses don’t reach success isn’t that they don’t want to grow, it’s that business owners don’t’ focus on priority first.
Profit is a theory of what the business will bring in, but ultimately, the cash is what matters. A business can have a positive profit with negative cash flow, how is that even possible?
Accounts payable and Accounts receivable. If a business sells products but doesn’t receive the cash equivalent, it moves to accounts receivables. Likewise, if a bill is due but is unpaid, it falls into the accounts payable. Managing your accounts payable and receivables correctly can help your cash flow by thousands.
These aren’t just accounts, they’re relationships each company accounts receivable is another company accounts payable.
If you’re worried about cash flow, these unbelievable cash flow tips that can move your business to the next level. Cash flow is an increase or decrease in the amount of cash business or individual has on hand.
Operating cash flow is the amount of cash generated by a company’s normal business operations. As a rule of thumb operating cash flow should always be positive, negative operating cash flow means the business is losing cash from business operations.
With negative cash flow, most business owners resort to selling assets like a vehicle or computer, dipping into savings, or raising money. If your business has a negative operating cash flow, your sustainability is in jeopardy. Without sustainability, your business will fail.
Operating cash flow should move in a positive direction, a business that makes less money on more assets is one that will eventually be out of business. A business that makes more money on less and fewer assets understands metrics, and uses them to build their legacy.
Protecting your business
Incorporating your business protects personal assets, protecting your business is all about having the proper paperwork; here are 7 things you should know to legally protect your business. All business owners want to protect their business, but how many of us honor that by putting the proper paperwork in place.
You can protect your business by having the proper insurance in place. Having insurance doesn’t protect you from the risks, but it minimizes the amount of pain you experience afterward.
Hiring an expert can help you protect your business if you can’t navigate the fog, experts cut through the mess and save us time. I remember the first time I worked with a personal trainer. They helped guide my form to protect my muscles while I worked out. Otherwise, I have a higher risk of injury because I wasn’t willing to ask for help.
If you plan to build a successful business, which I’m sure it is, I mean, think about it. No one, and I mean no one starts a business and says, “I sure hope this business tanks.” But business is complex, and understanding the administrative side of it can save you a mountain of headache.
Protecting your business and understanding your metrics goes hand in hand. If you don’t understand the numbers, then you’re the most significant danger to your business currently. By having a regular projection call, you can receive the proper education and training necessary to understand your business metrics and the ones that matter.
If you struggle with accounting, it’s your business. It is struggling. If you don’t know what to measure, how can you indeed expect to reach success? Success isn’t something we stumble upon blindly; it’s something that meets the well prepared gladly with open arms. If you’re building a business understanding your metrics is a priority, it allows you to adjust, maximize, and grow your profitability.