Hello SOTGC community,
For the average entrepreneur dealing with business, finance is not an easy task. In most cases, the bottom line to spend less than you make remains important. In even more instances, owners must speculate on finances that are not readily available. The ability to make decisions based on these principles is often referred to as the art of finance, and this process is one of the most important skills a business owner must have.
Begin by deciding which decisions are most important — for example, each month make a list of things that need to done for the business. Develop a strategy and execution plan of how it will play out. Some financial decisions will be strategic (“What new acquisitions will help gain the most of the market?”) while others will focus (“How much will we pay for insurance?”). Without prioritization, all decisions will be treated as equal — which usually means the important ones won’t be analyzed as needed.
Once you have identified what key decisions need to be made, next you should assess the factors that go into each of them. Who will play what role in the decisions? How often will this occur? What information is available to support the decisions? Use this examination to help understand which decisions from the past need improvement and what processes will make them more effective for your business.
Good business decisions start with good data. Be obsessive about collecting high quality, useful data from your business on an ongoing basis. Without good information to work from, it will be hard to know if you are making the right decisions — and even harder to tell whether a decision was the right one. Having regular monthly meetings with your accountant or bookkeeper is vital to your knowledge of where your business is at financially. How much cash or credit is available? How much is paid out each month? These are questions you should be able to answer on a daily/monthly basis, and this information is the heart of the financial decisions you make. Establish a system in your routine that supplies these numbers for you on a consistent basis. This data is what drives the financial decisions.
Detailed and accurate recordkeeping is the key to efficiency and forecasting and planning for your business’s future.Sometimes, a business may appear to be financial sound; for instance, it may have $100,000 in receivables and only $50,000 in payables. However, if the majority of those receivables are 30-, 60-, 90-, or 120 days or more overdue, they do not count as cash on hand. Suddenly, your business is more financially fragile than originally perceived. This effects any cash or credit decisions you make. Savvy business operators establish an operating budget and refer to it at least monthly to determine whether expenses are within the parameters established. Without a budget of established parameters, it’s hard to know how much they can really afford to spend. Unless you can look at your operating budget picture as a whole, you cannot make informed decisions.
Put Your Data to Work
Depending on your decision, a lot of data simply doesn’t matter at all. If you’re trying to grow your business with speed, focus on the information that affects your short-term finances, like the profit and loss and balance sheet. As your business grows, you’ll need to expand your data. But even then, be careful that you don’t waste time on information that doesn’t matter. Most entrepreneurs are busy running their businesses and don’t have time to step back and think strategically. Yet this is crucial. Without a strategy, you will never successfully act on the data you’ve accumulated. Each month that your financial data is created, take the next step to (1) make a list of what financial decisions need to be made based on those numbers, and (2) create an action plan to act on those decisions.
The elements to effective decision making can be broad, remain focused on business needs, and include execution in the process, which is often overlooked.
Do you feel you have an effective business plan? Share with us in the comments section below.