Tag Archives: Cash Flow

Without a Financial Scorecard Your Small Business is Destined to Fail

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“If winning isn’t everything, why do they keep score?” – Vince Lombardi. That is one of my all time favorite quotes. Now, I know that there is debate on whether or not we should be a society that stresses winning over doing your best, but when it comes to business, unfortunately, doing your best is not going to keep the doors open. If you are not beating your competition and not making money then the likelihood of your business surviving is at stake. There are several ways you know if you are winning but the best way to keep track is to have a financial scorecard. What exactly is a financial scorecard and what does it mean for a small business? That is exactly what we are going to answer and my hope is to have you understanding enough after this post that you stop what you are doing and start your “scorecard!”

In business numbers are how you are judged and it doesn’t matter how many innovative products you bring to the market if you do not know your numbers you are going to struggle and could be destined to fail. Here is a simple way to look at what your scorecard is and I like to make things simple. Think of your scorecard as after each month, quarter, or year as if you are winning a game. If your sales are higher than your costs you are more than likely winning. Now, before you go saying, “well duh” there are a few more components that you need to consider, but the main point here is your scorecard is the life of your busy and how healthy and strong it is.

So, if your financial scorecard is the lifeline to your small business then what does it consist of? The financial scorecard consists of four components and they are; PNL ( Profit and Loss Statement), Balance Sheet, Cash Flow Statement, and your Budget.

Now that we know what areas consists of our scorecard let’s explore each one just a little bit more.

PNL (Also known as your Profit and Loss statement) – The PNL measures the financial performance of the business for a given time period. The PNL will consists of revenue line items and expense line items. When you have those two set up you then take your revenue and minus it from expenses to get your profit (REV-EXP=Profit). Pretty simple but most small business owners just look at their bank statements each month to see if it is going up or down. Spend the time to write out each month your revenue and expenses. Knowing what areas are bring in you more income or is costing you more will help you budget better and also focus more on either cost reeducation or revenue enhancing strategies!

Balance Sheet – The Balance Sheet is composed of three things; Assets, Liabilities, and Owner Equity. The equation for this is Assets – Liabilities = Owner’s Equity. The balance sheet is used to score the financial condition of the small business at certain point in time. The problem that most small business owners face is that their Liabilities tend to be higher than their assets, which leads to negative cash flow.

Cash Flow – I am sure you have all heard the quote “Cash is King” and it is very true in business, so theCash third component to the scorecard is the cash flow statement. We have all heard the statistics of small businesses failing in the first years of existence and one reason for that is the lack of cash on hand to keep the business afloat. It is important to know your “cash burn rate”, which is simply how much cash you are going through in a specific time period. In order to find out your cash flow and burn rate you need to do the following equation:

Income or Revenue
–
COGS( Cost of Goods Sold)
=
Exp/OH/Fixed
–
Owner Salary
=
Net Profit
+
Equity Inflow
=
Cash Position

It is important to set this up on a monthly basis because each month things change and so does your cash position. For example, one month sales might be 100k and the next month they may only be 50K but your fixed expenses and salaries did not change, which could allow you to have a smaller cash position. There are very few business who will not experience a cash gap at some time during a business year, so it is important to have the cash flow statement to plan accordingly.

Budget – The final and fourth component to the scorecard is the Budget report. It is important to forecast out your revenue and expenses. The budget helps you mange the planned future performance of the small business and also gives you insight as to how well you are predicting outcomes. A lot of times I see small business owners just guess on revenue or expenses because they say that how do I know what is going to happen in the future but this is the wrong thought process.
Let me give you an example, I am sure most of you have heard of Southwest Airlines, and some of you may know that they have put together one of the longest stretches of positive earnings for a public company. Now, remember this company is an airline and as most of who drive we see gas prices go up and down all the time, so then how do they predict gas prices in their business. Well, they hedge their bet. They have people who look at the markets and buy gasoline futures months in advance so that when the price becomes volatile because of some event they do not get caught up in it. As a small business owner you need to do the same. If you buy material know when the material is more expensive and buy more at the current levels. Hedge your bet and forecast into the future.

Alright, I kind of got off track and will probably do a post just on “hedging” in the future but for now go set up your scorecard and start keeping track. Know your numbers! Start having a MBN ( Manage by Numbers) approach to your small business.

To Your Success,
Coach Dave

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Dave’s Top Ten Learned Lessons for 2010

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Hey everyone! It has been almost two weeks since I have actually posted something on the site and it was done intentionally. I wanted to take the remainder of the year to reflect and plan for the exciting year ahead. 2010 has been a year of growth for me, I have learned many new life lessons this past year and today I want to share them with you. So, without further ado, “Dave’s Top Ten Learned Lessons for 2010!”

In no particular order:

1.) Change will occur – Whether you want to change or not, it is inevitable that change will happen. It might be a slow gradual change or it might be fast and sudden. Embrace it and realize that nothing lasts forever. Sometimes change can be for the best. For me, being thrown into starting my own business was the best thing that ever happened to me.

2.) Save for a rainy day – My wife’s parents and my parents always told us both to make sure you save for a rainy day. They preached how you never know when some unforeseen circumstance might occur that you may need to tap into some savings to keep things running smooth. Well, thank you so much much mom and dad for instilling that trait into me. Having that safety blanket has given us the ability to not worry about finances if something unforeseen happens.

3.) Have your fiscal house in order – This is different than saving for a rainy day in the sense that if you are leveraged to the hill with expensive cars, houses, fun toys, etc… the saving that you put away will be blown through in no time at all. If you have debt know the difference between good and bad debt. Having a credit card with 29% interest is not good. Having depreciating assets that do not generate you cash flow are not good. Increase your financial IQ and learn how to make your money work for you.

4.) Have a back up plan – As I mentioned earlier change will occur and one day you might wake up and find yourself asking “What next?” Make sure you have a back up plan in place. Always, keep networking and making sure that you are building your “well” before you need it!

5.) Faith – This past year I have grown tremendously in my spirituality and faith in God. Having that belief allowed me to get through some of the tough times I encountered this past year. All I can say is “Believe!”

6.) Family and Friends are everything – I have some of the greatest family and friends in the world. When times were tough for me my friends were there to give me support and reassurance. My wife, whom is my best friend, has been such a huge supporter and as I say, “A Rock” for me as I venture into my own business. I am very thankful also for my mother who has always instilled in me that “I am a winner and winners never quit!” I want to thank all my friends and family for your support! Also, one more thing and that is something I learned a few years back from listening to Jim Rohn speak and that is do not be lazy when it comes to managing your relationships with friends and family because they are your life support when times get tough!

7.) Cherish the moments – I was listening to the radio and a new George Strait song came on the radio that talked about life is not the breathe you take but the moments that take away your breathe. Wow, that hit home with me and made me realize all the amazing moments in my life I have experienced and the future moments that I know are ahead of me!

8.) Life is a journey – I read somewhere when you are in a rut you need to start a gratitude journal. The goal is to write down all the great things you have accomplished in your life and then everyday start writing down all the things you are grateful for that day. Doing this exercise made me realize that there will be times when things seem tough and not going your way but when you look at the big picture you experience and do some amazing things! As the great Jim Rohn says, ” You are either in a crisis, coming out of a crisis, or in a period of great things happening!” Life is a cycle and enjoy the journey!

9.) Money isn’t everything – I know this is a shocking statement coming from me but the biggest lesson I have learned this past year is that the focus of life should not solely be on making money. Don’t get me wrong money can create many opportunities and make life easy, however, it should not be how you judge success. If you hate what you are doing then all the money in the world isn’t going to change that. Focus in on doing what you love and judge your success on the contribution you make to society.

10.) Never quit – It is so easy to quit when things get tough. Far too often we give in too soon. We are an instant gratification society and when we don’t things quickly we give in. If you ask any successful person who created something big they will tell you that they had to overcome leaps and bounds to succeed and as I venture into my new business venture I have made it my modus operandi to “Never Quit!”

I hope that you are able to relate to some of my lessons and maybe even take one thing away from them to implement into your life and career this upcoming year! I truly believe that this is going to be a great year! I look forward to sharing with you more of the exciting things I have in store for 2011.