“Where does our money even go?”
I heard this recently from a friend who was having a difficult time sticking to a budget. He can pay bills and cover expenses, but the thought of saving or planning for a financial emergency is completely out of the question. This scenario plays out over and over in individual finances, but it also happens to businesses. There are outwardly successful companies being run and managed by very intelligent individuals that are at a total loss when it comes to managing their finances. When I need an expert, a plumber for instance, I take no shame in contacting that professional. And yet when it comes to money management, people shy away from discussing it with a professional for as long as possible–sometimes after it’s already too late.
Let me describe a scenario that I have encountered: A business owner with various patents in her industry sought advice from her CPA. Sales were doing well but she wasn’t making enough profit. In fact, she was just barely breaking even. It was apparent to her financial advisor that the majority of her expenses were being drained by a third party distributor of her product. Her CPA’s advice?
Sell your business. Go work for someone else.
Now, as nearly all business owners can attest, her business was her dream–a tangible product of her hard work over many years. Of course she didn’t want to sell her business. But she also didn’t want to break even with zero profit. She wanted her business to succeed and to see her efforts come to fruition. She had everything she needed–everything except a financial advisor that could help her strategize financial and help her understand her business from a financial perspective.
When she came to me, I reviewed her books and saw that her only profit for the prior year was a settlement she received in a lawsuit. It had taken her 6 years to pay off one-third of a loan from her business partner. She was working out of her home, adding to the stress of her family. First and foremost, we determined where she could cut costs and how to make her business more efficient and therefore more profitable. The saying may be trite, but sometimes it really does take someone “thinking outside of the box” to help guide to an acceptable solution. It is one thing to see a business and review its history but it is another to be able to ask the right questions of what could improve the company. I did ask some hard questions:
What if we sold your business?
How much is it worth?
Why do you use certain vendors?
What if we tried a new distributor?
What do you want to achieve financially?
What if we did something completely different?
Since our first meeting, her business has had a full revival. That business partner that she was making payments to? Paid off in less than two years. Distribution costs decreased 66% and with the savings, she was able to purchase an office with enough warehouse space and staff to easily control hands on distribution. These changes relieved the stress and worry of her profitability and allowed her to work and develop her product more efficiently.
Today, she’s producing more than ever and is becoming a common name throughout her industry and beyond. She’s been featured in national television interviews and her product was recently named as a “favorite thing” of a talk show icon. Had she listened to her previous advisor, she would have stayed in her home office, adding tremendous pressure and stress to her family and home environment or she would have abandoned her vision completely.
This is simply one example of how proper budgets and accurate financial projections can benefit your business. Budgets, whether developed for individuals or businesses, takes into account incoming money compared to expenses. Budgets are primarily about controlling costs, and projections are primarily used for businesses to visualize hypothetical situations related to growth, business productivity or just changes in their market. These are extremely valuable tools to test proposed changes with real numbers rather than blindly trying something new. Budgets and projections take time and expertise to complete accurately, and they should involve management input and the preparer’s experience. It also helps businesses understand how expenses can cluster together and to see which decisions are and are not impactful to their bottom line. Many feel that financial planning of this nature is an unaffordable cost or that it’s an unjustified expense, However, quite the opposite is true: having a clearly defined path to stay on track with expenses is extremely valuable and will prove essential to growing your business.