Most business owners are intelligent and driven people yet over 80% of businesses fail. The top two reasons businesses fail due are due to a lack of business experience by the owner and cash flow issues or lack of profitability.
Individuals start business for people, process or product, not for producing and generating financial reports. Most business owners have a passion for what they do in hopes of achieving financial freedom.
The accounting system we use in the US is financial theory, an axiom, which is constantly in flux as to rules and regulations. Additionally, the approach is impractical for most business owners. It isn’t that they can’t read a profit and loss statement or understand the basic principles of a balance sheet, it is just that these reports don’t provide the day to day information they need to make decisions in their business. GAAP focuses on top line revenue creating the perception that an increase in top line/gross revenue will result in more profit. If a business is losing money, increasing top line revenue will only result in greater losses.
Most of the time, financial statements as “generally accepted” does not give us what a business is worth (for example…depreciating an asset that either does not lose value or increases in value such as real property. Also, the statements do not provide the intangible value of such things as brand, intellectual property, skillset of employees or owners, etc.).
Many business owners look at their bank account balances at least weekly and many times daily and use the balance as a standard in making spending decisions for their business. This results in spending the cash they see since most people generally use up what they perceive they have available.
Neither looking just at a P&L nor at cash balances gives a business owner the information to know what is working in their business. They aren’t able to find out what is working in their business and what isn’t. The tasks that are profitable and those they need to change or dump altogether.
Business owners many times begin adding service offerings to try to grow their business resulting in a lack of efficiency which is crucial for sustained profitability. This lack of focus kills profitability and financial disaster results if the offering is outside their core genius or business purpose.
What is the solution…in coming podcasts we will talk a little about profit first, some principles put forth by Mike Michalowicz. The approach is basically an accounting hack…changing the way we look at our businesses’ finances. The method changes the traditional sales minus expenses equals profit to sales minus profit equals expenses. This is a method that helps a business owner focus on limiting expenses, increase efficiency and help identify some of what is working and not working in their business. The system utilizes a minimum of 4-5 checking accounts to place cash into certain buckets for particular purposes such as income, operating expenses, taxes, profit, and payroll.
A business’s books are meant to be a tool to make business decisions, not to create confusion or busy work for bookkeepers and accountants. Using profit first or other principles not generally accepted may be more ideal for your business. It is the job of accountants to take the books and generate the financials in a digestible format for lenders, shareholders or for preparation of tax returns.
Encourage business owners that are listening to consider working with your accountant, advisor or coach to structure your books in a way that makes sense for you to be able to realize profitability, generate the necessary KPIs and make the decisions necessary to revitalize or grow your business.
