If Financial Ignorance = Bliss, you’ll be Blissfully Broke…
Imagine for a moment that you are playing an important game of tennis. It’s the club final and you are the favourite. There is a big crowd and as the game progresses, everything seems to be going to plan. You’re playing well and you’re winning points. Victory can’t be far away. There is only one problem: there is no scoreboard and the umpire is keeping score to herself. No one except her knows what’s really going on.
Nevertheless, you plough on and despite being in the dark about the score, you feel positive that eventually she will declare you the winner. You are so confident that you can’t help but relax just a little. You start enjoying the party-like atmosphere.
Then out of the blue, the umpire declares that it is match-point … to your opponent! You can’t believe it. You go back to the baseline and set yourself up for this big point. But it’s too late to get your mind back into gear and you hit the return wide. The game is over, the final is lost. If only you’d been able to track the score during the game. You would have been able to fight back earlier.
Are You Playing A Game of Scoreboard-less Tennis in Your Business?
Every day, hundreds of businesses operate as though they are playing a game of scoreboard-less tennis. Every month the owner runs on feelings – no more than a guess about how well the business is traveling. A day or two after month end, she will look to the ‘umpire’ – her accountant – who will give her the ‘score’ – her financials. And most times, her perceptions will prove inaccurate and it is far too late to do anything about it. When things changed – when her ‘opponent’ started to get on top – she simply didn’t see it coming.
Your financials are to your business what the scoreboard is at a sporting contest. Can you honestly say that you know where you are and where you are going? Do you often look at your financials and wonder what they mean? Do you waste money and time chasing new leads and sales instead of fixing your business and making it profitable?
Could Your Financials Use a Bit of Foreplay?
When is the last time you took two hours out of your week to print and look at your financial statements? If you are like most small business owners, you never dreamed that the ability to understand how money works would be very important. You thought: “That’s for the accountant to worry about. Sure, the accountant shows me a few reports from time to time, but I don’t see the need to really understand what they mean. If there was a problem, she would tell me, wouldn’t she?”
You probably don’t realise that all those numbers – the financial DNA of your business – can tell you a lot more than you thought. They can tell you why you’re suddenly struggling to pay the bills, why your business is not performing as well as you thought and why you’ll have to forego your salary – again – because there isn’t enough cash.
The financials are the story of your business. Numbers don’t lie. They are one of the few objective indicators of how your business is performing and WHY. Regardless of any justifications you use to explain why your business is not performing – the economy, the shortage of ‘good’ staff, the competition, the rent – the numbers tell the truth and can lead you to the solution. You just need to learn HOW to use them to your advantage.
The BEST Way to Achieve Profitable Growth
You cannot achieve profitable growth in your business without first establishing that you are in fact profitable. Closing more sales is not enough. It’s a bit like spending 100% of your time practicing your serve while neglecting to watch the scoreboard and practice your returns.
Break-even is one of the most simple and powerful calculations that you can use to measure and enhance your profitability. A company is said to “break-even” for a period (usually a month) when its sales revenue catches up to its costs. Specifically, accountants talk about break-even as the point where ‘fixed costs’ (rent, salaries, etc.) are matched by ‘gross profit margin’ (sales revenue minus COGS).
Calculating your break-even each month and knowing specifically which day of the month you break-even, allows you to hit the sweet spot of your company and make informed, strategic decisions about how to achieve growth that is profitable for your bottom line. And that is the best way to hit an ace in your business.
