WARNING: Are You Making These Common Mistakes When Coaching A Company?
You are missing the point?
It has often been said that “earnings are meaningless and cash flow is king”. You know why?
It is possible for a business to show profit over a period of time, but have negative cash flow. In fact, companies that make (on paper) profits go under every day. Negative cash flow, if sustained for an extended period of time, will eventually cause the business to run out of money and cease operations. Therefore, knowing the cash flow position is critical to staying afloat and knowing how to unlock more cash flow is imperative to effectively train a business owner or senior executive.
Are you chasing the wrong goal?
You may have the brightest product or service, but if the business runs out of cash, it won’t matter. Most companies make the fatal mistake of thinking that they simply need more customers. If they only had more customers, they would have more sales and more profits … and they would be more successful.
But is this true?
Can companies simply advertise their way to more sales and better results? No. In fact, advertising and discounts often have a negative impact on bottom line and cash flow. Simply put, the initial instinct most coaches and business owners have is to focus on increasing sales. Employing this strategy, chasing customers and sales, is often the worst thing you can do for the business.
The common assumption is that if you have a business where the price you charge for your products is higher than what they cost, then everything will be fine – it will be profitable and successful. The gain is good, don’t get me wrong, but it just isn’t enough on its own. To be sustainable, the business must also have a healthy cash flow.
If you are like most coaches and business owners, you never dreamed that the ability to understand how money flows in and out would be incredibly important. He thought, “That’s something the accountant or finance department needs to worry about. Sure, I may be shown some reports from time to time, but I don’t see a need to really understand what the numbers mean. If there was a problem, they would tell me, right? “
You probably didn’t realize that all those numbers – the financial DNA of the business – can tell you a lot more than you thought. They can tell you why the business is not growing or is struggling to meet targets. They can reveal why there is less money in the bank account. [again] than last month.
Financial numbers ARE the history of the business. The numbers don’t lie. They are one of the few objective indicators of how a company is performing and where the problems lie. Ironically, finance is the most overlooked area of business coaching and most professionals choose to specialize in disciplines of leadership, sales, or marketing. Unfortunately, without a solid understanding of finance, it is impossible to train effectively and produce predictable results.
Regardless of the justifications you (or your customers) use to explain why the business is not working: the economy, the ‘good’ staff shortage, competition, supply chain issues, etc. – the numbers tell the truth and can lead you to the solution. You just need to learn HOW to use them to your advantage.
You need a bit of Financial Foreplay.
Are you avoiding the numbers?
When was the last time you spent two hours of your week analyzing the financial statements of a client or your own business? Can you honestly say that you know exactly where you (or they) are and WHY? Do you sometimes wonder what the numbers are trying to tell you? Are you guilty of wasting money chasing after new leads and sales instead of fixing the business and making it more profitable?
Most coaches and business owners make the mistake of assuming that they can improve the business by examining the profit and loss and balance sheet on a monthly basis. Unfortunately, these statements only tell part of the story. In fact, you cannot measure a company’s cash flow position by looking at the bank balance or examining the financial statements at a specific time.
This is because most companies use what is called “accrual” accounting. Instead of recording “money spent,” they record spending as “money spent plus money committed to spending.” So if the shares were purchased on account, accrual accounting includes the value of that purchase from the time it is made, not from the time the account is paid. Accrual accounting takes into account the amount of money that has been spent plus the commitment to spend in the future. The same is true in reverse for earnings: it includes the money received plus the money expected to be received. When a sale is billed with 30 days to pay, the value of that invoice is included in retained earnings, even if the money is not received for at least another 30 days.
Therefore, when accountants speak of “earnings,” they generally mean “higher earnings” as opposed to what we would call “actual or cash earnings.” Accumulated profit is the expected actual profit after “already committed expenses” and “expected earnings” are taken into account along with actual (cash) expense and actual (cash) profits. As a result, the profit shown on an income statement (or profit and loss) is a more complicated and less useful representation of a company’s current financial situation. Net earnings in isolation cannot be relied upon to measure the financial health of a business.
In other words, cash flow must be tracked over a period of time and can be measured by the following calculation:
Net profit (year to date)
+/- inventory changes
+/- changes in accounts receivable
+/- changes in accounts payable and GST and
+/- changes in fixed assets
=
Cash Flow
Changes to these 4 Balance Sheet items have a significant impact on the cash flow and viability of a business. That’s why achieving the correct inventory levels, optimizing accounts receivable and accounts payable, and investing only in assets that generate a return are critical when working with a business of any size. In fact, a coach can often have a more tangible impact and influence on a company by focusing on these 4 areas than by directing the effort towards attracting new clients and increasing sales. And many times, it costs the company very little to implement highly effective strategies in these 4 areas.
In practice, it is vital to take into account both the actual profit (cash flow position) and the profit increase. It’s a common mistake to focus solely on increasing profits, a mistake that has the potential to cause a business to go bankrupt prematurely.
Are you sure it is profitable?
Profitable growth should be the goal of any business. However, you cannot achieve profitable growth without first establishing that the business is truly profitable. Attracting more leads or closing more sales may not be enough – costs and efficiencies in a business change every day and this means that we must constantly monitor and measure results and take appropriate action. Focusing solely on customers and sales is a bit like spending 100% of your time practicing your tennis serve while still looking at the scoreboard, analyzing your competitors’ strategy, and practicing your returns.
Break-even point is one of the simplest and most powerful calculations that you can use yourself and with your customers each month to measure and improve profitability. A business is said to “break even” during a period (usually a month) when its sales revenue reaches its costs. Specifically, accountants speak of breakeven as the point where ‘fixed costs’ (rent, wages, etc.) combine with ‘gross profit margin’ (sales revenue minus COGS).
Therefore, it follows that the breakeven point with profit is the point of the month when the company covers all fixed and variable costs and begins to reach the desired profit target. Remember, if you and your clients are in business and don’t have a charity, the goal is profitable growth. To achieve gains, you MUST plan to achieve them.
Calculating the breakeven point (and breakeven with profits) each month and knowing specifically on which day of the month the business breakeven allows management to make informed and strategic decisions on how to achieve profitable growth for the bottom line and improve cash flow position.
Are you ready to get results?
Knowing where the financial problem is in a business will allow you to focus your time and resources where they will help your clients make the greatest impact on bottom line results. And if you really want to be a successful business coach, and it’s not just a hobby or a way to pass the time, you will find a way to incorporate a little financial foreplay into your day so that you can help others get in shape! your business and start taking home more cash! It’s the fastest and most efficient way to get your clients to work not just on their business.