When asked if his business was profitable, a new client recently told me, “I guess so; I’ve got money in my checking account, so I’m good to go.”
The client didn’t know whether he was profitable but seemed to think he was doing OK and in the driver’s seat. Our conversation reminded me of an article, “What the Banker Found,” written by Kate Lister for Entrepreneur Magazine.
It was the true story of an entrepreneur who appeared to be successful. Over a three-year period, the bank had loaned him money to add 12 new stores. He planned to continue expanding and had asked the bank for a term loan and increased line of credit.
Upon review, the banker found several “red flags” and, rather than approving the loan request, focused on recouping money the entrepreneur already owed. The entrepreneur had concentrated on growing his business and was blind to everything else. He didn’t see the flaws in his business operations until pointed out by his banker.
According to Lister, the bank downgraded the entrepreneur’s credit, forced him to track his performance on a weekly basis, put him on a watch list and planned to call the loan if he didn’t get his financial controls in order.
The gist of the article was the importance of having a sound financial management system, regular and effective financial reports and checks and balances.
Lesson learned: The banker is the last person you want to spot problems in your business.
How are your financial controls?
Sound financial controls not only increase your likelihood of success, but also make your business more attractive to lenders and can enhance your access to capital.
Are there pricing, waste or purchasing issues in your company, or are these areas under control? One way to tell is by looking at your GPM (gross profit margin). Is your GPM growing or shrinking, and how does it compare to others in your industry?
If you use debt to finance your business, are you using the appropriate debt instrument for what is being financed? Sound management dictates financing current assets with current liabilities and long-term assets with long-term liabilities.
If you have a line of credit, are you using it appropriately to fund the temporary cash needs of your business, or does it stay “maxed out?”
Knowing the difference between “income” and “cash flow” is essential. Both are critical to the success of a business, but cash pays the bills — income does not. Understanding “liquidity” is equally important and refers to your company’s ability to pay its bills when they come due.
Liquidity measures the cash you have or will have, compared to cash needs in the future. Knowing how much money you need and when can mean the difference between success and failure. Without sufficient cash to operate, even profitable businesses fail.
Above are just a few examples to consider when thinking about financial controls for your business. Having a sound financial system helps you manage your business and tells the lender you are “at the controls,” and it can improve your access to capital.
Setting up a financial system, including controls and measures, is not difficult and the Georgia SBDC Network can help. By tapping into the expertise of SBDC consultants, clients have learned how to better manage their businesses and gained access to millions of dollars in funding.
If you would like to be “at the controls,” contact the SBDC nearest you and let the expertise of its consultants help put you in the driver’s seat of your business.
Susan Caldwell is area director of the Augusta office of the Georgia SBDC Network. She may be contacted at firstname.lastname@example.org.