The Bright Seven Sector Model: Finance
Posted on 25th October 2021 at 12:52
When it comes to the finances of your business, there is one ultimate goal: to be in profit. The problem is, 80% of all businesses fail in the first five years, while another 80% fail in the next five years. To put that in perspective, if 100 businesses started this year, just four of them would still be around in ten years time.
A huge number of these fail because they don’t have control over their finances. You can offer a fantastic service, have good sales, but if you’re not managing your cash flow effectively, your business will die.
In this sector of our business model, we’ll talk about strategies to manage your finances effectively, and convert products and services into a consistent cash flow that helps sustain and grow your business long term.
To do this, we use the ASSET model.
Sector 3: Finance
The A in ASSET stands for accounts. The most basic function of your finances, you need to have accounting information for your business. This needs to be a platform or software that tracks your finances and gives you information on your monthly income and expenses.
If you haven’t already, find a cloud-based accounting platform to manage your finances. Whether it’s Quickbooks, Sage, Zoho, or another tool, you’ll need quick and easy access to P&L data.
P&L is the profit and loss of your business. It’s a history lesson, looking back over time to measure your margins and figure out if you’re actually making money.
Your P&L data will also show you how to reduce costs in your business and improve your margins.
You might find you’re giving steep discounts to keep clients but these are eating into your profit margins too heavily to give sustainable profits. Or maybe you’ll discover that giving those discounts results in better payment terms or long-term contracts.
Analysing this important accounting information regularly shows you which clients give the best profit and which ones costing more than they’re worth.
We like to refer to them as A, B, C, and D clients. You should aim to have as many A clients as possible, convert Cs and Bs to As by increasing your pricing or upselling your services, and let go of D clients.
If you’re too busy, that usually means your prices are too low. Putting your prices up will get rid of D clients, help boost Cs to Bs, and free up more space in your calendar for better-paying clients.
As well as looking backwards in your business finances, you also need to look forward to predict cash flow. You do this with a cash flow forecast. This will tell you what’s coming up in terms of sales, contracts, supplier payments, etc.
If you already have an accountant, they’ll be able to do a cash flow forecast for you. I have several clients who did a cash flow forecast during the difficult period of the Covid-19 pandemic. They found it much easier to manage their finances and make better business decisions because they knew what was up ahead.
Once you’ve got this important accounting information, you can start analysing it to look for trends. You’ll start to see seasonal trends, quarterly trends, etc. that show you the busiest times in your business. Once you know this, you can start planning your outgoings and schedule with a clear idea of how much time and money you’ll have to work with.
If you’re brand new to this, start with a 12-week rolling cash flow. Then, each month for the next 12 weeks, make a budget based on your cash flow. This makes it much easier to allocate spending more wisely, cut back when cash flow is tight, and invest when you have the funds available to do so.
When you have a budget in place, it’s much easier to negotiate with suppliers because you know the maximum you’re willing to pay. Without one, you’ll easily get overcharged and run into financial issues down the line.
The second letter, S, stands for Statement. This refers to the financial statement that shows you what is owed to you and what you owe vendors. You might refer to this as your balance sheet - it simply shows you the current state of affairs of your open projects.
Are you on top of collecting money from clients? When I work with contracting businesses, I often find they don’t get their invoices out in a timely fashion, which means customers don’t pay in a timely fashion, and there’s a cash gap in the business.
Closing that cash gap with better invoicing helps form a consistent stream of income, minimising those stressful points with little money coming in.
When looking at your statements, it’s also important to look at debts. When you’re caught up in a busy schedule, it’s easy to forget to chase invoices and make sure they’re getting received and paid.
Having a process in place for following up with clients, checking invoices were received, and sending out reminders when they’re not paid will help ensure clients pay on time.
All of this is why you need to regularly check your statements so you know what you’re owed, what you owe, and when you have cash coming in.
This helps manage supplier expectations as well as clients. Having better control over your finances means you can manage when you pay suppliers and agree to better terms. You’ll also be more confident taking on larger projects, knowing your current financial situation can support the additional costs.
Next up, we have S for Scorecard. When working with clients, I get them to take all that information they gain from their finance review and put it into a scorecard.
Imagine you arrived halfway through a game of cricket - without the scoreboard, you would have no idea who was winning or how the game was going. You need to look at the scoreboard to see how many overs there are, how many runs they've got, how many people are out, and how many wickets they've got.
It’s the same thinking for your business. A scorecard gives a quick snapshot of how your business is doing. It includes information on the different areas of your business so you can quickly see what areas need attention and where you’re doing well.
The scorecard also helps you aim higher in your business and reach new milestones. When I’m with my personal trainer, I keep a scorecard for kettlebell lifting so I know that I’m always aiming to lift heavier weights for longer sets. Over the past twelve months, I’ve gone from lifting 12kg to 20kg. Charting my progress helped me push myself to new personal bests that I wouldn’t have achieved without seeing my progress each week.
The same applies to your business. By having a scorecard of your finances, you can see your progress and analyse the information to make better decisions.
Warren Buffett says the business cannot speak to you, but you can talk in the language of business - numbers. This is the best way to keep track and push your business to new levels of success.
E in ASSET is for experience. Once you have a firm grasp on your finances, you should get an experienced financial advisor or accountant on your team. Someone who loves going through spreadsheets, pulling data together, and creating your scorecard.
This person will analyse your P&L, look at your margins, suggest improvements, find problems, and manage your cash flow.
They can tell you what money is coming in, what you can spend, control the budget, and make sure each department is on target with their spending.
It’s always best to outsource finances to an experienced financial advisor to take the stress off your shoulders. Not only is it a full-time job, but it’s something accountants train and study for years to do. Having this person will be an invaluable support in helping take charge of your finances to move your business forward.
Finally, the T in our ASSET model stands for Treasurer. Your business needs a financial director who is in charge of the cash flow of your business. They are the most important financial person you will take on and will oversee the big picture of your business’s financial goals.
They understand the numbers, oversee mergers and acquisitions, aid in complex tax issues, and are the go-to person for accountants. Overall, they ensure your business is legal and growing in profit.
If you have multiple sites or an international business, your treasurer will manage finances intersectionality and will negotiate with banks to get your terms and financial needs met.
This is the most sophisticated level of finance in business and most businesses won’t need a treasurer until they are over the £10 million mark. But this is the ultimate goal of your finance department.
Right now, if you don’t have a treasurer or financial director, you can think about hiring a part-time position to help improve your finances, protect your financial interests, and make sure your business is stable and future-proof.
It’s vital to get the finances of your business in order before moving onto the next sector of our business model.
Without a firm grasp on your finances, your business cannot be sustainable long term. Begin by spending time reviewing your finances yourself and putting software in place to give you better analytics.
Once you have a better understanding of your cash flow, P&L, and business trends, you can begin working your way up to the point of needing a dedicated financial director.
In the next sector of our model, we’ll talk about your business operations. This is all about improving your day-to-day functions to deliver a better service and streamline your process. When you optimise your operations, you’ll cut costs and have more time to take on more clients - adding to your bottom line.
Watch the video below to learn even more about Finance
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