I see many folks
struggling to adapt to the curve balls Covid-19 is throwing right now, and
I grew up on a commercial farm and have been working with Ag businesses for over 25 years. That experience has given me a unique perspective on the current economic environment brought on by Covid-19. In agriculture, every day has the potential for disastrous events, many of them completely outside of your control with far reaching consequences. Early or late frosts, droughts, floods, disease, wild price swings in your products and supplies, all can dramatically impact your business. So what can you learn from Ag during these trying times?
- Take care of your people. Period. You need your customers, vendors, employees, and your family to make it through tough times. You take care of them, they take care of you. Alienate them, and you will never recover.
- Cash Flow is critical. I like to think in terms of the good, bad, and ugly scenario planning. This year, I am including a really ugly category as well.
- Stop thinking in terms of absolute numbers and start thinking in probabilistic terms. Play the odds for success.
- Highly leveraged businesses are at high risk. Borrowed money is an accelerator, and it works both ways – up and down. Its it probably to late to change your debt position, but think about that as banks try to loan you money. Banks have marble floors for a reason.
- The higher your risk level, the more cash reserves you need.
- Adapt to changes quickly. Be flexible and fast. What worked yesterday isn’t going to work tomorrow.
- Diversification can be a good thing. 9 times out of 10, my advice to entrepreneurs is to focus, because they have so many ideas, they need reigned in. But businesses that have multiple income streams and diverse customer bases are in a much better position now than those who are dependent upon a single customer or single income steams. It works best if you build complementary and synergistic segments.
- Mindset is everything. Focus on what you can control, work on the biggest problems first. Recharge each night so you can be fresh the next day.
- Tough times are followed by good times. Think long term to stay focused on what matters most. Your monthly and quarterly targets are gone, position yourself for the long term.
- Remember, hard times make for great managers.
Step back, breath
and think logically. Put numbers to
thoughts. We are in this together, don’t
forget to ask for help if you need it.
Put aside the fear and get excited to be thinking differently and
challenging the assumptions we once knew as fact. You can do this, AND make your business
better than ever.
Stay apart and stay
Covid-19 has changed the business environment more in the past week than anything in the past decade. I am looking at not only budgets, plans, and strategies, but at my business model as well. Everything from the customers to products, logistics, employees, and processes that connect all of them.
Step back, breathe, and think logically. Put numbers to thoughts. Don’t worry, we are in this together. Some are scared, and with good reason. Put aside the fear and get excited to be thinking differently. Challenge the assumptions you once knew as fact. You can do this, AND make your business better than ever.
Stay apart and stay
As we approach the end of the year, it is a perfect time to think about strategic planning session to develop meaningful metrics and monitoring systems. We offer a free year end strategy session, you can find out the details at https://successscorecard.com/financial/.
During a financial review, we dig into the numbers behind
your business. No cookie cutters, just good old-fashioned elbow
grease. Sessions can be a broad overview for a fresh viewpoint, or very
detailed to answer specific questions. We use our experience to help you
develop the business processes and metrics to ensure your success.
I know first-hand the importance of developing key
performance metrics and the impact it can have on the bottom line. We love taking our experience and helping
entrepreneurs build lasting and sustainable businesses that reach their goals. We have found that many businesses start with
a dream and a fantastic product, but next to no business skills. It is our mission is to give entrepreneurs
the skills and information necessary to thrive.
Budgeting is the one thing that most owners hate. Many owners hate it so much, they never do it. “I’ll wait till my taxes are done to see how much money I made.” “Sales are going up, must be doing something right.” “Money in the bank, it’s all good.”
If things are going along well, why bother? Why bother going through the mental gymnastics of planning your finances with a budget? For me, that’s the perfect time to plan your finances. Because we have all been in the position of working harder and longer and questioning is it worth it. And often we forget that dollars in the bank is not the only measure of success.
Building a solid budget allows us anticipate issues before they happen and think about ways to avoid them. It helps us answer the question “Is it worth it?”. A budget is a tool to help you focus on your priorities and avoid distraction. It provides a focus for your business.
One of the reasons managers don’t create a budget is because it is hard to look into the future, let alone pull all of the numbers together. Here is a thought process to help you develop a strong budget.
Start with your historical profit and loss statements, hopefully at least 3 years. Break your cost down to a cost per unit value. For a detailed post on how to calculate your per unit cost of production, click here: https://successscorecard.com/2018/02/28/managing-by-the-numbers-per-unit-cost-of-production/. Average the cost per unit for the time period you have and look at the trends per year and what your plans for the next year on before deciding on a good value to use.
The next step is to break the accounts into fixed and variable costs and recreate a yearly budget based upon how much you think you can sell the next year, multiplying the variable costs per unit by your projections and keeping the fixed costs level. With a bit of Excel magic, you can tie all of the variable costs back to one cell that you can change and quickly see what happens to your bottom line when you change your sales projections. I always like to do a good, bad, and ugly scenario because as optimistic humans, we tend to think sales will always go up, a bad assumption all too often.
This process is particularly useful when your business is changing. It gives us a projection tool that helps us answer the question “Is it worth it?” as you take on more responsibilities and work. Take your time, run the numbers and make a good decision based upon numbers.
Sales growth is wonderful, and what most of us like to see happening. But the real indicator to keep your eye on is profit. During growth periods, there are people coming and going on your payroll, new product lines, tools and computers bought, bigger offices, more phone lines, the list goes on and on. But the question remains – are you better off with or without the sales growth?
You don’t need to wait for your taxes to get done to answer this questions. By merging sales data with your profit and loss, you can look at income and expenses on a standardized per unit basis, allowing you to compare how things were to how things are. QuickBooks has a nifty export to Excel feature that make life much easier to make the calculations.
Need help with the process? That’s what we are here for. In person or by Skype, we give you the numbers to make better decisions.
I have been working with a maple syrup producer recently. It is a very seasonal business with large fluctuations in production driven by the weather. They have been selling wholesale and looking at increasing their profit margins by moving into the retail markets by developing an online store. Everything was on track until Mother Nature decided to throw a curve ball. The crazy spring weather reduced production by 35% from last year. There was barely enough production to cover the wholesale orders.
The retail expansion plans were shelved until next year. At least until we started looking at the numbers a bit more. We had been looking at equipment purchases to package for the retail market and had some solid cost numbers on the equipment and the cost of production for each stage of the operation.
The aha moment came when we asked the question “What if we bought high quality syrup on the wholesale market instead of producing it ourselves?” When we compared our costs to wholesale prices, we found that not only could we make money by buying wholesale and packaging for retail, but we could make as much money as producing it ourselves.
By shifting our focus and looking at different ways of reaching our goals, we came up with a way to continue the growth rate. The original focus was always produce as much as possible and sell what you make. Shifting the focus to finding a way to sell maple syrup instead of produce as much as possible seems like a small change, but it will mean the difference between an average year and a very good year.
The question is, what small changes in your thinking can have big impacts to your business?
You spent all this time gathering information for your CPA to do taxes. Income, Expenses, Capital Purchases, Depreciation, and every other detail your CPA wanted you to dig up. And then you paid Uncle Sam a nice chunk of money. Most people don’t want to look at financials any more for another year, but this is exactly when you should be delving into the nuts and bolts of your business to assess your strengths and weaknesses. What do all these numbers mean and where do you start?
When I am asked to look at the health of a business, I start with this list.
- EBITA – Earnings before Interest, Taxes, and Amortization. A look at how your efficient your business is without taxes or debt
- D/A – Debt to asset Ratio – how dependent upon debt is your business.
- ROA – Return on Assets – What percentage did you make on the total assets of your business
- ROI – Return on Investment – How much did you make on YOUR investment
- Owners hourly rate – often owners pay themselves a salary, but breaking it down to an hourly rate can give you a different perspective
- Cost of production per unit, compare to previous years. Are you making improvements in cost control of critical areas.
- Budget vs Actual – look for how accurate your plans were.
- Profit and Loss, compare previous years.
- Inventory Adjustments – make sure inventory purchases and use are not artificially inflating or deflating profit.
- Accrual vs Cash Profit and Loss comparisons- in particular, I am looking for big changes in AR and AP, Inventory values
- Profit and Loss, with percent of income and expenses. Look at the big expenses and see if small changes can make a big impact on the bottom line.
- Develop or tweak budgets – now is the time the numbers are fresh. Look at your plans for growth or cutting unprofitable areas of your business. Incorporate marketing plans with financial plans. Plan your profit levels.
- Balance Sheet – Look at changes in Net Worth
Ideally, you would be looking at these indicators on a quarterly or monthly basis. Minor adjustments to spending or income timing can have big impacts on your total tax bill. The trick is to know you need to make adjustments in the same tax year, not 3 months after.
It is a long list, and it takes time and thought to go through. But the payoffs are there. Don’t be intimidated by numbers!
So you have finally come to grips with the fact that you are in over your head financially. What is your first step? STOP DIGGING. Stop. Spending. Money. Now.
Then start answering these questions.
First of all, where do you stand financially? Who do you owe money to, who owes you money. What assets do you have, what liabilities do you have? What contracts do you have with clients?
The next question is where did you spend the money – cash, credit, barter, checks, debit cards – all of it. Don’t hide anything, you are only lying to yourself. It is important to know how you got to your current situation.
Third, find out where can you make the most money the fastest. If you don’t know your margins, you don’t know where to focus your efforts. Focus on high margin products until you are stabilized. Look at both the income and expense side of the equation, sometimes it is easier to increase income than cut costs. Keep in mind that 10 hours of work at $40 per hour is much better than 40 hours of work at $10 per hour. You may not have the $40 per hour work available when you need cash, but work towards that type of work. You will be much better off in the long run.
Third, develop a realistic budget. A budget not only shows cash inflows and outflows, but what your priorities are. By making a conscious decision on what to fund and what to ignore, you have set your priorities. Any time you deviate from your budget, you should question if the purchase fits your priorities. If your priority is to stop bleeding cash, then you should probably cancel the spring break trip to Florida.
Financial turn arounds happen every day. But it takes a concerted effort to change the habits that got you there in the first place. Make a commitment, enlist help, and develop a plan to make it happen. It is your choice!
I have been having a running conversation with a person who wants to open up a storefront. Very good ideas, and he was ready to move fast. So when I said, “Not to be forward, but what do your budgets show for sales and expenses?” I was met with silence. Then a quiet “I don’t have a budget yet”. Sadly, that is a common response. And while the business idea may be solid, I really prefer to make mistakes on paper.
Asking about a budget did not shake his confidence in the business. It actually took a bit more than that. I shared a customized budget template with him and filled in a few numbers based upon conversations with him. When he started seeing how much sales he would need to cover cost of goods sold, rent, gas, electric, internet, and that pesky thing called owner draw (that’s your pay by the way!) he started thinking about the volume needed to carry a storefront. It was only then that he slowed down and started to see the benefits of a solid business plan.
After using this template as a framework to look at his business idea, he backed off from signing a 12 month lease. And that’s a good thing. He has not lost sight of his dream, but is now focusing on building up his web sales before investing in the overhead of a storefront. Now his focus is clearly defining his target market, building up his list of potential customers and finding out not only what they want and need, but how much they are willing to pay. Those numbers are plugged those numbers into his budget, making an even better plan.
I have often heard that a business plan rarely survives first contact with customers, and I agree wholeheartedly! But that does not mean that you ignore the basics of finance and sales. Instead, focus on the needs and wants of your customers as you develop your budgets and business plan at the same time. A business plan is much more robust when you approach the process by focusing on the customer first. Take the time to work through the numbers first – whether it is a brand new business, or an expansion of an existing business, it pays to make the mistakes on paper first.
Need help developing a financial framework to look at your business? Want to see the sample Excel budget that helped him change his path? Send me an email and I will be happy to share it with you!
Sometimes training seems expensive, until you take into account the savings in time. Bear with me on the math (I’m a numbers based person!), but if 4 employees are averaging $35,000 per year, and take an 8 hour class that saves them 30 minutes per day, it takes under 2 months to pay off the class and the time spent in the class. I have seen equipment payoffs of over 3 years in some cases! After that, the money goes right to your bottom line.
The lesson to learn is that it pays to assess your skill sets on a regular basis and find out where you can get big payoffs. Spend time where it is important.
|Hours per Week
|Labor Overhead – Taxes & Benefits
|Dollars per hour (wages/weeks/hrs per week)*labor overhead
|Course Time (hours)
|Per Student Labor cost during training (dol per hour * course time)
|Number of people in class
|Total Student Labor Cost (per student cost * num students)
|Instructor Cost in Dollars per hour
|Instruction cost (Instr. $per hour * course time)
|Total Cost – Student and Instructor (instr. cost + student labor cost)
|Total Cost of training per student (*student & Instr. cost / # students)
|Hours Saved per week as result of training
|Annual Savings (hrs saved per week * working weeks * labor $ per hour)
|Net Savings (savings – cost)
|Months to recoup investment (total cost / annual savings / 12 months)