What do you think about when you hear people talking about business growth? For most of us, it’s typically turnover.
You hear it in the news all the time – “A company had year on year sales growth of 5%”. Leaving everyone thinking that the company mentioned is hunky dory.
It’s easy to think that more revenue = better profits and more cash in the bank, isn’t it?
But how often does that happen? When your business turnover has doubled, trebled, quadrupled or more – has your profit and cash increased in line with sales growth?
What do you tell yourself if it hasn’t? It’s fine, there’ll probably be jam tomorrow?!
In some businesses this is true. Significant investment is needed to get those businesses going.
But I challenge business owners when they say ‘most businesses don’t make money in the first year’. I think it’s a limiting belief imposed from years of people saying it. Because I think most businesses can and should make a profit as soon as you start trading.
I also believe that until you focus on your bottom line as much as the top, there won’t be jam tomorrow.
This phrase was mentioned to me by another accountant in my mastermind group when we were talking about the progress of his business compared to mine. He’s a few years in front of me in practice, and when we were discussing a particular problem he said, “that’s the issue, we’re always focusing on jam tomorrow when it rarely arrives. You need to focus on it today”.
This led me along a route of really thinking about business in general and the focus most people, myself included, have on turnover. Thinking that a business turning over twice as much will fix a profit (jam) problem.
Turnover for vanity, profit for sanity, cash for reality
I first heard this phrase 10 years ago from the mortgage broker who was helping us with a house purchase.
It’s completely true isn’t it? Especially now. When cash is definitely king.
The quote also triggers some key questions to ask when I’m quickly assessing the health of a business. Or when customers are talking about their intentions for their business in the next period.
Is there profit? What are the margins? Is there cash at bank? What are current assets and liabilities outside of cash?
We all need a reality or sanity check at some point, remember this next time you do.
Borrowing without fixing your problems is a fallacy
Last week I was discussing a client’s year end accounts with them, the profits were much less than they had hoped for. They had borrowed their way through the year – a loan and HMRC debts accruing.
After a long discussion, the main issue was a HR one. Which when fixed (either a new staff member or considerably more output from them) would start to put the business on a better footing without the need to borrow.
Borrowing money can be a lifeline. But unless you resolve the root cause of the issue, it won’t fix it.
And you’ll just need to keep borrowing…
I recommended a Tim Ferriss Ted Talk (watch here), which has a memorable phrase –
Easy choices hard life, hard choices easy life.
Borrowing money is easy. Making HR decisions is hard.
Barry Hearn was on 5Live on Sunday night, talking about his money troubles in the 1989 recession. He’s also an accountant by trade, and he said he realised then that he needed to rely on reserves, not borrowing, to fund his business and has done ever since.
A solution – Profit First
Profit First is a book which advocates a system for putting profit first (surprise, surprise!)
The premise is simple –
- Your business should operate at certain percentages for profit, expenses, tax etc based on your turnover size.
- From your your annual turnover, there’s a table in the book which gives you percentages of what you should be spending on each. You calculate where you’re at, and what the differences are.
- Every two weeks, add up the cash your business has been paid for.
- Put the relevant percentages of cash into different saving accounts – profit, owners pay, taxes etc.
- If you’re at a deficit in your main account, you’re spending too much.
Steps 1 & 2 are a real eye opener – it was for me! If you want the percentage table, drop me an email I’ll send them over to you.
I’ve also developed a spreadsheet for our business to start doing this after speaking to another accountant who does the same. He said it’s completely smoothed out his business cashflow.
If you want that, let me know and we can book a video call to go through it with you whilst tailoring for your business.
Let’s start future proofing our businesses and focus on jam today.