As a business owner, you work harder than anyone I know. I admire the work ethic, community spirit and the blood, sweat and tears that owners invest in their companies.
It saddens me that so many owners will not see the financial fruits of all this hard work because of the financial mistakes they make.
Before I take on a new coaching client or a new peer group member, I survey their management practices.
An initial question I ask is about their level of financial management is, “Rate yourself and find your level?”
Level 5. Review financial reports monthly, and operational reports weekly, and other operational numbers daily, making key decisions along the way.
Level 3. Look briefly at reports monthly (or every other month), making just a few decisions.
Level 2. Look at reports quarterly at best.
Level 1. Wait till year end to see how I did.
I then survey them on 37 specific financial habits and systems to identify their approach and their unique opportunities for financial improvement. The results become a road map to financial success.
Here are 10 of the most common financial mistakes I see. Which one should become your priority?
Mistake 1. Using annual sales goals. In order to scale and manage your sales force effectively, you must look at budgets versus actual on a monthly basis, by sales person and by product/service type. You can’t be an effective sales manager without doing this.
Mistake 2. Using cash-based budgeting. This may be much easier to do than accrual-based budgeting, but accrual will tell you how well your company is operating in any given month. Accrual will help you see problems as they arise and help you steer your company safely. The key is to manage your numbers monthly, using “true” accrual-based budget, in order to maximize your annual profit results.
Mistake 3. Taking your owner’s income from profits and perks. If you had to replace yourself, what would that cost on the open market? That’s the number you should put in your overhead budget. Profit is for return on investments, not for salaried compensation, Also, it’s fine to take extra owner’s perks, but don’t let that muddy the company budgets. Give your team clean numbers to watch.
Mistake 4. Tracking your cash like you do your household bank account. Your goal as the investor in your own business is to create a company that throws off cash each week, ideally in each division. To know if that is happening, you need to track the incremental cash created each week and each month and aim for positive cash creation. If you track it consistently and by department, you may see that some divisions are upside (cash negative) and remain so for many months of the year. It is shocking when you look at it.
Mistake 5. Budgeting for 5 or 10 percent profit while dreaming of 20 percent net profit. The industry average is 5 percent; my peer group clients average is close to double that, and my top performers are achieving 20 percent net profit and more. How? By setting up a budget to achieve that and by not relying on a “wing and a prayer” to get them there. Prayer helps, but must be fortified by a real marketing, sales and production strategy. The key is to benchmark yourself with the best in class, not the averages; and never (ever!) be satisfied with industry averages.
Mistake 6. Holding division managers accountable without adequate financial metrics. You can’t expect to make a high or consistent company profit when each profit center or division leader is not accountable for his or her own monthly budget. Period. When I first take on a new client, this is the first place I look, because that is where there is so much low-hanging financial fruit that will improve your bottom line.
Mistake 7. Keeping crews in the dark on their financial performance. Treat them as smart competitive humans, and they will act like it. This can be kept simple, e.g., Did you get all your jobs done in the daily time frame given? Or use real numbers if that is how you manage them. Weekly, you can do a forced ranking of which crews came in the best. Keep it simple and motivating. Money is made in the field, so include your field in tracking their success. (Incentives can be a big part of this. You can’t reward what you can’t measure.)
Mistake 8. Budgeting for unrealistic billable hours goals. Hope is not a strategy. It is best to look back a few years, by month and by crew type, to see what is realistic. How many billable hours and nonbillable hours did you use each month over the past few years? It’s fine to aim for improvement, but it’s best to budget for reality in order to ensure a profitable year; otherwise you will start the year in a hole!
Mistake 9. Not consistently reviewing numbers with your leadership team because they are too busy. Or worse, you simply keep them in the dark. The most important action you can do with your team is to develop a dashboard to review with them week in and week out and to review your actual P/L and Balance sheet monthly. This will improve their financial literacy and accountability in your company. Take the time to dive into it, even if, as a leader, you are not as confident as you would like to be. Confidence and learning come from doing.
Mistake 10. Your job costs are reviewed sporadically or on a monthly basis. If you are in the estimating and install business, then the only way you know how well you are doing is if you review the results as quickly as possible and make changes to your estimating or your installation practices. A weekly rhythm is a good place to start. There are many good systems you can set up these days to crunch these numbers on a timely basis. Don’t let the thrill of the game distract you from measuring your performance after every game.
In summary: This year more than ever, you must be on top of your game. This includes financially. If you are going to build a business that is scalable and valuable, you must get your financial house in order. Use this checklist as a place to start. And reach out to me if you have questions.
To learn more, follow my on my new podcast (found on iTunes), The Ultimate Landscape CEO.