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Do Your Financials Need Therapy? Try Purpose!

Guest post by: Floyd Talbot

Article Overview: Can you imagine your financial statements lying on a therapist's couch, seeking for advise on how to gain greater strength to face the market? They may appear perplexed and bewildered, not understanding why the numbers are so anemic or even what they mean. Many small businesses experience this. From my experience, a large portion of business owners have poor financial management. Did they make a profit? Then nothing more needs to be examined. If no, head scratching begins. The financial statements contain a wealth of information for managing the business. They must be closely scrutinized for the business to be successful. Not only that, but financial management includes so much more: sound practices, planning, markets analysis, objectives, and cash flow analysis.

Do Your Financials Need Therapy? Try Purpose!

Therapy sounds like a rather New Age approach for business financial management. However, sometimes radical intervention may be the only way to move a business not only in the black again but also toward greater revenue and growth. This type of therapy isn't just talk like personal therapy can end up becoming. Talking in meeting after meeting, over the telephone, by e-mail and through a myriad of other ways can leave business executives and owners frustrated and exhausted, especially when change is not forthcoming. Business financial management requires more than talk. We can get into a therapeutic "I'm OK, you're OK, but my business stinks" scenario and completely miss the reasons for the doldrums, stagnation, and depressing performance. Rather intervention requires much more than talking about and around the business and its problems or pointing fingers at staff for missing numbers or arbitrary expenses. It takes purposeful action. Purposeful action is three dimensional: Hindsight, insight, and foresight.

In today's ever-changing business environment, financial management has almost become a lost science. Time and the rush to market trumps thorough and rigorous financial management. It has become the stepchild of marketing and sales, cast into a corner until the next crisis arises and cash flow takes it toll on the firm. Marketing takes center stage for capturing the next customer and causes an imbalance to occur in the allocation of resources for successful business execution. Beside, owners and managers decry, "I don't have the time to plan for next year. I'm already spending 12 hours a day just managing my business."

Encountering and engaging your clients and competition require purposeful financial management with the proper tools, effective communication, sufficient resources, and useful measurements for gauging your performance. Are you prepared to encounter your competition and engage your customers, bankers, and vendors in business? Do you have a sharp mission focus? Do you have clearly defined and attainable objectives by which you measure your success? What are your top three challenges that nag at you and stand as obstacles toward reaching your business objectives? How are you overcoming them and moving forward successfully? These are sound financial management therapy questions to pose to yourself and your management team. They are not conference room fodder to be returned to in one meeting after another.

In my years of business, I have encountered numerous small businesses whose cash flow inhibited them from growing, who had a fuzzy outlook on their financial condition and performance, or whose working capital reduced from year to year, causing them continued stress over the prospects of their business. The top reasons for their struggles consisted of:

■ A lack of accounting or finance knowledge

■ The failure to plan beyond a few months

■ Not knowing their markets and how to reach them

■ Not having clearly defined and measurable objectives

■ A cash burn rate that outstripped their financial resources

The last of these I call the fizzle factor. This was not tackled through talk but by purposeful, focused, and informed decisions that arose from a systems infrastructer that communicated essential information and goals that directed it. A continuing challenge exists between balancing business management infrastructure and market presence. If a rush to market outruns its infrastructure, the business could sizzle through its financial resources before getting its products and services to market.

Today's financial volatility lends to numerous short-term unknowns in the planning process for the small business. Businesses must adapt quickly to changes in financial conditions, technology, and the various means of marketing to gain traction in its markets. That is the reason financial management becomes so vital for the business and entrepreneur. That is the reason for insuring that a sound infrastructure is in place for supporting sales and marketing efforts, such as the use of technology, capital requirements, financial controls, and business planning. The outlays for these structural elements enable owners and managers to manage the firm efficiently and expeditiously.

The Small Business Administration performed research on the issue of business failures and bankruptcy. Among the reasons it discovered were lack of planning, trade credit issues, poor cash flow, poor recordkeeping, and failure to use advice. [1] All of these reasons can be summed up in the words financial management. Peter F. Drucker writes, "[Management] has to think through the institution's mission, has to set its objectives, and has to organize resources for the results the institution has to contribute." [2] Thinking is not simply talking. Rather, it is activity that leads action. Therapy without action leads to lots of talk and stagnation. Thinking that does not assume performance is dreaming that leads to that same stagnation.

What does first-rate financial management look like? It really boils down to insight, foresight, and hindsight, that is, having a 360° eye on your business.

Hindsight means having accurate accounting to measure your past performance. Accounting has several complementary components without which it cannot be useful and produce accuracy: management controls for risk reduction, accounting systems that effectively communicate business performance, and organizational discipline that leads to a continual upward growth.

The first factor, accounting, appears obvious to business managers. However, obvious does not equate to priority and enterprise-wide application. Business managers realize the need for recording and reporting on revenues, expenses, assets, liabilities, and the firm's capital. However, managers frequently overlook several critical issues in making accounting software selection and implementing accounting practices. Two major issues are a) insuring that financial controls are rolled out in every department and function of the business and b) insuring team effort rather than independence of effort.

Every event in the business has a cost and each business function contributes toward the revenue stream. Events spur requirements through processes. Requirements and processes incur costs and generate revenue. Revenue requires costs. Customers provide the revenue. Bankers serve as intermediaries and sources for capital requirements to support customer acquisition. Vendors provide materials and services for customer products. An adequate accounting system effectively records and adequately communicates all the economic events throughout the business, both on the revenue and the expense side.

Financial controls insure that all functions head in the same direction and support the firm's objectives. The accounting system and financial controls must be implemented in tandem to insure successful financial management.

Insight refers to technical knowledge and administrative know-how. A business owner or chief executive officer builds the business on technical know-how and financial savvy. Administrative know-how is often a weak link in the business. To make up for this weakness, the CEO hires an administrator in the form of a Chief Financial Officer or Controller. Smaller businesses who cannot afford a full-time Controller engage someone to manage business on a part time basis.

Administrative know how cannot be neglected or given secondary priority in business. Planning, tools, communications, and measurements are instrumental in sound business administration. They manage requirements, capital, revenue stream, costs, processes, and constituents. These events cannot afford just a bookkeeper or accounting clerk.

Foresight signifies the planning process. Any startup business requires initial capital to meet its early financial obligations. This is to be expected and should be factored into operating cash requirements. However, from the startup stage of the firm forward, business owners or managers must always face the tension between the speed of generating a revenue stream and the costs in obtaining that revenue. Limited cash and its burn rate places tremendous pressures on the firm's managers to ratchet up the timing of product release. That is the reason initial capital becomes vitally important. Business planning paves an effective path for revenue generation and financial management. It crystallizes the company's mission, sharpens its objectives, identifies its strategies, and provides the financial targets for its future. It also identifies specific projects capital requirements for funding operations and revenue.

Insight, hindsight, and foresight do not apply only to large corporations. These are umbrellas for purpose-driven businesses of any size, especially budding ones thriving to mark their mark on the market. They are especially pertinent to the small business environment. Small businesses do not have large financial reserves and frequently operate on minimal capital. Such streamlining and cost savings resulting from financial controls, enterprise-wide accounting, and strategic planning provide such enterprises with greater flexibility to meet the demands of their markets.

Therefore, when an economic downturn occurs, they are better prepared to meet the leaner times and see their way through them. During times that are more prosperous, effective planning, focused financial management, and financial controls set the course for greater wealth production and market penetration. Financial therapy only works through purposeful action that sets the business straight on a successful course of action. It minimizes talk and stresses action toward success.

[1] Bradley, Don B. and Chris Cowdery, Small Business: Causes of Bankruptcy, n. d., p. 211.

[2] Drucker, Peter F. The Daily Drucker: 366 Days of Insight and Motivation for Getting the Right Things Done, HarperBusiness, 2004, p. 18.

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Article Tags: accounting, cash flow analysis, financial controls, financial management, financials, management, planning, revenue, small business
Referred by: http://www.Andrew-Rogerson.com



Related Forum Posts
Re: Success - I study success intently, and would like to share: Here's two excellent and nearly identical success-formulas from a couple of the world's masters. FIRST FORMULA: 1. Passionate Desire 2. Clear, Definite Purpose 3. Committed Decision 4. Take Action In Faith (Bonus Secret Sauce: 5. Repeat Consistently) I made a video about this, but am not allowed to link it yet. Google "Ryze Success Steps" for it. Oh, and this is Napoleon Hill's (Master Of Success Laws)'s Formula. SECOND FORMULA: 1. Passionate Desire 2. Understand It Is Already Done (Faith) 3. Relax & Allow It To Unfold (Go about your life calmly) This one is courtesy of Abraham-Hicks (inspiration for the movie The Secret). Hope that helps!


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