My client looked at me and threw his arms up in the air, exasperated, and said: “We have a ton of business! But I just don’t know if we really are making any money.”
His statement saved me a lot of diplomatic build-up to the topic of our meeting.
We’d been working on his Business Plan. One of his larger clients, long sought-after and finally won, had requested his Business Plan before they awarded him a large, long-term project which he perceived as being lucrative. Our work commenced, starting with establishing that his annual strategic plan wasn’t the same thing as his Business Plan. Then we started the archeology of identifying the financial information needed to produce the Financials section of this Business Plan.
I reviewed 15 years worth of financials (yeah, I have to admit, I kind of got into things). It was a fascinating exercise because I see this same financial pattern emerge time after time when working with my clients. They begin their business with high energy and a small amount of cash. They churn and burn. They build up their client base, often by acquiring customers who place small-scale custom orders that eat into time, materials and manpower. The business owners call this “paying their dues.” Their bottom line increases, they feel elated. And they maintain that pattern, calling the business that continues to flow in their “Word of Mouth”. Or they grow their business by “diversifying” – adding larger, long-term custom orders which take forever to be awarded that inflate their bottom line over multiple years while eating into operating margins. And they fill gaps in their revenue stream by maintaining their loyal base of small-scale “Word of Mouth” orders that continue to eat into their profit margins.
After all, this pattern of business has kept them in business. And after several economic tsunamis, who wouldn’t feel this is a well-deserved feather in their caps?
BUT THEY ARE STUCK. Where they’ve always been. And they are perpetuating a bottom line that is not in touch with where they want to be. And they don’t understand what they need to do in order to move the dial up a notch or two.
These businesses are stuck in more than a rut. They are mired in a network of business habits that need drastic improvement. Processes that become reactions to blips in their status quo rather than a mindset that starts at forecasting and strategic planning. Crisis management and corrective actions based on the assumption that everyone knows what they were doing rather than proactive project planning. Dropping everything when a large project comes through the door and focusing all hands on deck to that project… and then expecting folks to pick up where they left off with their other responsibilities. Accounting and a 12 month perspective rather than financial forecasting and a CFO mindset (both are needed, by the way).
Sound familiar? This is not the exception in many small businesses. This is the rule. And it is keeping small businesses from moving to the next level. And making money.
The reality of the situation is that these types of business are not making any more money than they were 15 years ago. Except that the money they are making now is worth less than what it was worth 15 years ago. Their bottom line and financials look the same today as they did 15 years ago. Except they have more customers now than they did then. And single digit – instead of double digit – profit margins.
The recommendations I’ve made to many of my clients? Go back to square one and re-learn how to crawl before they walk much further into 2011. Deconstruct how they do business to understand how and why they got where they did. And reassemble the same elements, with a completely different emphasis. Include some education in that mix, please.
Not a pretty tale but a sobering, realistic one. And an exercise I strongly suggest you take the time to do for yourself and your company. And for you entrepreneurs? Build it right from the ground up and you may avoid deconstructing later on.
The buck does, indeed, stop with your business financials. They are the true read on where your company has come from and where it is going. Take your business’s pulse, understand your options, and make a diagnosis to grow healthy in 2011.