There is money in the bank, so it must be ok… right?
OR – What’s so important about getting using a business compass…
Could you imagine sailing to an exotic foreign land with a map but no compass? Looking at the plan of where you think you should be but unsure if that’s where you actually are….
There’s money in the bank, so it must be ok… right?
Imagine the destination is Fiji (Success). Now Fiji has many islands and they look very similar (happiness, wellbeing, abundance). Looking out the window of your very expensive cruise liner, and referring to your map (your business plan), the islands appear easy to identify, some big, some small, all with palm trees and the promise of a private resort, relaxation and cocktails.
The reality is that while you are cruising around and around looking for that perfect destination, provisions are getting scarce. The boat lease still needs to be paid, the diesel bill is mounting, the crew are getting restless and the tide is washing you further from your course. You refer to the map and realise that you should have taken map reading lessons. You sailaround a rocky outcrop and what you thought should be a sandy beach with cocktails, is now a bunch of aggressive natives (creditors). Their pirate ship, apply named the ‘ATO’, is being prepared to be launched. The crew are complaining about working conditions and some jump overboard and swim ashore. The dream and reality are now so different that the dream is shelved and the focus is on staying afloat rather than a destination.
This is how it is for most businesses. They start with a great idea or plan – a destination called success that looks different to each person but has similar characteristics. It’s often vague, with words like ‘I’d like to be wealthy, healthy and wise’. Interestingly, ‘the wise’ part needs to come first before the other two show up.
This plan / idea spur on action. The cruise boat is on its way. As the plan was developed onshore and without a sailor’s input (business coach, accountant), it’s missing a lot of the details and costings that a detailed travel itinerary should have.
Let’s look at the analogy some more. As the Captain you need to consider:
- The destination – what success actually looks like in detail; the vision
- The map – business plan on how we are going to get to the destination
- Bursary, – cashflow requirements
- Layover plan for picking up Provisions – additional capital requirements,
- Satellite connections to the shore – checking the numbers to see if you are still on course, A compass of sorts.
- Weather forecasts – what are your competitors doing that could knock you off course
- Tracking of the pirate’s rout – making sure the ATO & regulatory departments are fed,
- Tidal charts – timing of money (ins and outs)to be able to pay creditors and collect receivables,
- Crew roster–organising HR, shift rosters and enlisting engagement in the vision
- Paying passengers – is it worth looking for partners? Will they want to go on the same journey? Or take a different rout.
- And what about this cruise ship – maybe we should start with a motorised dingy and upgrade as we go.
A Business Plan is powerful and shows vision, mission, culture, direction and obstructions.
The next thing a business must do is be able to measure and manage. Measure how far along the journey we have come and manage the resources it will take to reach the destination.
Most businesses use the bank balance as the major indicator for success. Buts it’s like looking at a random island and saying ‘that looks about right’. It’s an indication but a misleading one at best. Let me explain. Most businesses work on an accruals system of accounting. This just means that we put things on credit and pay them later (creditors). We then give other people credit to pay us later. (receivables). If our receivables pay us but we don’t pay our bills then of course the bank looks good. We have money but it’s not really ours to keep. Once we pay what we owe, then what’s left is ours to spend.
So the best compass to your business is a report called a Profit and Loss Statement.It’s a report that all accounting software packages have. It will tell you what money you earnt (even if you haven’t received the money yet) and how much it cost you to earn that money (even if you haven’t paid the bills yet). It’s a guidance system for your business. You can even add your budget to the reports so it will tell you where you are going off course.
Once you have your compass in place (P+L report) and regularly review your map (business plan) your travels will be a lot more controlled. Changes of course can be made sooner by relying on accurate data. Icebergs can be avoided and pirates will have no foothold.
This doesn’t mean you won’t have rough weather or sometimes be blown off course, but by learning your numbers you can regroup faster, turn that boat around and get back on track.
Remember, it’s your journey with that sandy beach with cocktails as its prize. Learn to use the financial compass and that dream could be reality sooner.