Jim Blasingame

Business futurist, award-winning author, speaker and columnist

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Profitability

Revealed: Financial Mysteries Four and Five

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This is the last of a three-part series covering what I call The Five Financial Mysteries. The first three Mysteries were about the relationship between cash, accounting, and profit.

In this article, I’ll complete my attempt to help you avoid becoming part of the business failure statistics. If you haven’t seen the first three Mysteries, be sure to look for the previous two articles nearby. Now, buckle up as I reveal Financial Mysteries Four and Five.

Financial Mystery Number Four
You can get squeezed between vendors and customers.

Vendors and customers are the prime entities you deal with financially every day your business is open. Understanding your relationship between these two – literally between, because your business is in the middle – is the key to cash flow management. The way to avoid getting squeezed is by managing your Accounts Receivable (A/R) Days and Accounts Payable (A/P) Days. Warning: This will get a little mathy, but not difficult IF you have current records.

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Revealed: Two more of the Five Financial Mysteries

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This is the second of three articles on how to prevent your firm from becoming part of the increasing mortality statistics of U.S. small businesses. That’s right. The SBA reports that 50% of small businesses fail in the first four years, instead of five years, as they reported 20 years ago.
 
In this series, I’m revealing what I call the Five Financial Mysteries. Actually, they shouldn’t be mysteries at all – they’ve been around for generations. But with this much Main Street carnage – a 20% increase in startup failures – it’s obvious to me that a lot of people haven’t learned what you must be able to do to sustain your business: fundamental financial management.

If you think you’re an excellent financial manager, then you won’t find any mysteries here. But if you think you could use a little help with your financial management, then this series could be just what you need. Don’t worry, we won’t get too mathy.

In the previous column, the First Financial Mystery was revealed: Cash and accounting are not the same things. Today you’ll discover the Second and Third Financial Mysteries.

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Revealed: The First of Five Financial Mysteries

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This is the first article in a three-part series on how to prevent your operation from joining those who are driving the increasing mortality of U.S. small businesses.

One of the pillars of the American Dream is the ability of any citizen to start a business from scratch, build it, own it and pass it along to their heirs. Research indicates that there are more than 25 million of these dreams-come-true in the U.S. Approximately eight million that have employees, the balance is independent contractors, professionals, etc., and together they create half of the U.S. economy. All of that is the good news.

The bad news is that the rate of small business mortality – when the dream turns into a nightmare – which was once 50% in five years, has now increased by 20% in the past 20 years (U.S. Small Business Administration). The reason for this unfortunate trend is associated with Blasingame’s 1st Law of Small Business: It’s easy to start a small business, but it’s not easy to grow one successfully.

The smoking gun that kills most small businesses is the Founder’s ignorance of or disregard for the financial fundamentals of business. And most of this business carnage could be avoided if every Founder understood what I call the Five Financial Mysteries. In this installment, I’ll reveal the first Mystery with the others to follow soon.

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It is possible to succeed yourself right out of business

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This is another offering in my ongoing series on understanding the fundamentals of business as we become better business managers. Remember, fundamentals are like natural laws: they don’t change; they’re the same for everyone, and you can’t succeed without understanding and respecting them. The fundamentals today are all about funding growth.

Consider the following scenario that plays out on Main Street every day:

“Finally, my business is growing,” a small business owner confides to his friend, “but why is it creating so much negative cash?” And then, with that deer-in-the-headlights look, he completes his report, “I thought by now, with increased sales, cash would be the least of my worries. I used to be afraid I couldn’t grow my business; now I’m worried it will collapse from growth.”

This entrepreneur’s lament is one of the great ironies of the marketplace: a small business in danger of succeeding itself right out of business.

Beware Blasingame’s 2nd Law of Small Business: It’s redundant to say, “undercapitalized small business.” This maxim is especially true for fast-growing companies because revenue growth depletes cash in two dramatic but predictable ways.

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“Customers from Hell” and the #1 business fundamental

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“This is for one of those customers from hell.”

That’s what a small business owner said to me during one of my road trips across the country to check on how things are going out on Main Street.

“Ann” was responding to my query about her business. Her full answer was closer to, “Business has been good. But now I’ve got to spend most of the day dealing with this customer from hell.”

Turns out, what caused this customer’s alleged domicile to be mentioned was because they required a lot of extra attention – they wanted things the way they wanted them. Like Ann, you might be surprised at my response, which is our next “Business Fundamental.”

“You should never have a customer from hell.”

Before you start yelling that you want to introduce me to some of your customers who surely are kin to Ann’s, let me tell you a story.

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Personal service businesses: Think prices, not wages

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Millions of small businesses sell personal services like consulting, website development, or janitorial services, instead of something tangible like a computer or a kumquat.

Unfortunately, pricing a service is not as intuitive as a tangible product. Consequently, service businesses too often don’t charge enough to sustain themselves profitably because of how they think about what they sell to customers.

Don’t make the professionally fatal mistake of comparing what you charge customers to deliver your product — a service — to how much you would expect to make per hour as an employee. Doing so, to paraphrase Mark Twain, is like comparing lightning to a lightning bug. You must think like a business, not an employee. You have to think pricing, not wages. Here’s why:

1. You’re a business now, which means you offer customers a price list, like you would see on a wholesale catalog or a restaurant menu, not a wage list. And you collect revenue, which is what businesses produce to create the gross profit that pays expenses, including the salaries, taxes and benefits of employees — and owners.

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