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By Ted LeBow, Co-CEO, Kitchen Table Consultants and Taste Profit Marketing
I've worked with many farmers and food business owners over the years who come to me feeling stuck. Sometimes these people wonder why they are making a profit but are always strapped for cash. Others tell me they are drowning under quarterly losses or that the bank won't give them the financing they need to operate.
The problem is many of these people aren’t focused on the financial side of their business, so they can't see what they can do the fix the situation.
Not investing enough in good record keeping, financial reporting, and inventory management, receivable and payables management means you will not have all the information you need to run and grow your business. It can lead to expensive mistakes, too. I know a lot of business owners who were not able to seize an important growth opportunity or who turned to overly expensive financing because they were lacking basic financial information about their business.
If your financial systems and reporting are incomplete and unorganized then it will end up costing your business. Here are five big costs of poor financials:
1. You have no clear direction. Having poor financials is like driving in the dark without headlights—chances are you won't get to where you wanted to go. There is no real road map, and you may have little idea as to what you even want to accomplish along the way. Financial management and day-to-day operational management go together. When you start making business decisions with little regard to the financial consequences- when you don't see the connection between what you do and the bottom line- that's when your business will get off course.
2. It's hard to make objective business decisions. When the financial side of the business is out of control, it leads to shoot from the hip decisions. You start managing today’s crisis at the expense of the future. If you are not properly tracking costs or determining what products are profitable, you won't be able to effectively adjust prices, manage your inventory, pay your bills, or even set your employee work schedule. Even if you are an expert in the technical aspects of your business, it alone is not enough to help you determine the health of your company and your decisions must reflect the true health of your business. What is good for a healthy person may not be good for someone who is ill and trying to recover. The same is true for a business.
3. You are always scrambling for cash on hand. I've met many farmers and food business owners who were generating healthy sales, but never seemed to have enough money on hand for the daily expenses. Whenever a shortfall comes up, they immediately start scrambling, looking for ways bring in more sales, cut costs or stretch their vendors. But a lot of times this backfires. At KTC, we've helped many business owners unlock thousands of dollars simply by looking at the way bills are paid, payments are collected and under used assets are used efficiently. Sometimes the problem is that money is sitting in unused inventory or equipment. If you are not paying attention to how the money is coming in and going out of your business, then it is easy to miss these cash cows.
4. You are not able to borrow money. While a community bank, credit union, or local lender may be sympathetic to your situation, you can't expect them to just blindly hand over money. When it's done properly, your financials tell the story of your business, and 80% of the battle to get a lender to finance you is how you tell that story. Without knowing why they are getting rejected, some frustrated business owners turn to expensive alternative financing arrangements, like factoring and business cash advances. While they may end up with money, the higher cost of debt can gut their business.
5. You will be physically drained. Because they are out of touch with how to make a profit, some business owners waste a lot of time and energy running around- to pay the bills, collect payments, and expand the business. But all of this running around means they have less time and energy to direct to both their daily operations and their long-term goals.
Bottom line: Not only do you need to set up the right accounting systems, but your financial reporting should be used as a tool to understand the overall health of your business and to pick out any key trends. Once you are in touch with the financial side of your business, you will have the information you need to handle set backs, secure financing, and find the best opportunities for sustainable growth.
Your financials should tell you (and your team) the story of how you make money and then you can decided how much money you want to make.
Do I have your attention? Does this feel like you? You are not alone. KTC has helped hundreds of entrepreneurs through this situation. I could write a whole book on the solution to these issues, but I’m going to condense the solution to five simple points:
Posted: to Economics of Organic Dairy Production on Sun, Jul 23, 2023
Updated: Sun, Jul 23, 2023