Chances are, you?ve never considered how your independently owned business is similar to that of General Electric or Accenture or even Apple Computing, have you? Obviously, there are enormous size and complexity differences, but there is one very important similarity: All must follow the same principles and best practices of financial management if they are to prosper. The methods and tools by which you and they operate are different, but the principles are the same.
From a financial perspective, all businesses need to know where they were, where they are now, where they want to go, and how to get there. Every aspect of business relates back to money. Oh, some will say the money is unimportant ? that they are there to serve their customers or make the world a better place. I agree with these worthy objectives. However, none of them can occur without money. Let?s look at a true story.
The owner of a Colorado tack and saddle shop was proud of the quality of the products he produced. Unfortunately, he was not doing well financially. In fact, he was headed for failure, but he did not recognize the depth of his difficulties. He had no system to help him understand how he was doing. Since he did not know what he did not know, he believed everything would work out if only he worked hard enough. I was about to give up on helping him understand his situation when an idea occurred. I pointed out the unconditional lifetime warranty spelled out in his brochure and asked if he really meant to stand behind his promise. Indignantly he replied that he would fix any problem or defect without reservation. When I pointed out that he must be in business in order to honor his warranty, he got it. He made the necessary changes to get finances under control. He stayed in business to honor his work and he made good money doing it.
Big businesses, like those mentioned above, do nothing without planning the financial aspect of any proposed project or business development effort. Clearly, entrepreneurs must do the same. However, many entrepreneurs often use mental bookkeeping while the big boys (and the successful entrepreneurs) work with their numbers on paper or on the computer screen. If your business plan, advertising plan, or cash flow plan is in your head, it does not exist. There is no such thing as a mental business plan. There are mental hopes, wishes, and dreams but there are no mental business plans. That sounds harsh but it is not meant to be demeaning. It means that, if you are ready to join the grown-ups in your field, you must use grown-up tools and best practices.
GE plans its cash flow. So should you. Apple calculates its return on investment (ROI). So should you. Accenture implements business decisions in a purposeful way. So should you. None of this happens by accident. You don?t need big business financial tools, but you do need tools appropriate to your size and goals. You?ve heard the old saying many times. ?Businesses don?t plan to fail. They fail to plan.?
Strategically, big businesses use the following process:
1. Make a plan
2. Measure actual results against the plan
3. Determine what went well and do it again
4. Determine what did not work and make the necessary changes
5. Repeat the process
What follows is a general process that big businesses apply to managing their business finances:
? Projected Income — expected income over the next month/quarter/year
? Actual Income — what actually came in
? Compare Actual vs. Projected Income — ask what worked and why — ask what didn?t work and why not
? Adjust the plan
? Projected Expenses — expected expenses over the same period(s) used for income
? Actual Expenses — what was actually spent
? Compare Actual vs. Projected Expenses — ask what caused the difference between actual and projected expenses
? Adjust the plan
? Projected Cash flow — expected cash flow over the same period(s) used for income
? Actual Cash Flow — what actually came in and went out
? Compare Actual vs. Projected Cash Flow — ask why the cash flow turned out the way it did — what can be done to improve it
? Adjust the plan
Remember: A goal without a plan is just a wish. Make a goal. Make a plan. Make it happen.