Cash flow is insufficient.
Customer retention rates are poor.
Sales are declining due to weak economic conditions.
Business model is flawed.
Expenses grow faster than sales.
These are just five of the more common reasons that small businesses fail. And fail they do. The statistics are sobering: 50 percent of businesses fail after five years; more than that after 10 years.
Surviving the Ups and Downs
Of course, you don't want your business to become another statistic, and you'll do whatever it takes to succeed, but you also can't prevent a recession or cutbacks due to your customers' financial situations, or wring success out of a flawed business model with a weak value proposition.
The fact is, dealing with adversity in business is something we as business owners do every day. In my business, one minute we can be riding on top of the world because a large sales order came in, only to have an unexpected major expense cancel out all the benefit—all within 24 hours! When faced with something going wrong, we solve the problem or we adjust. It’s how we survive and thrive.
The All-Telling Financials
So back to the question: What can you do to keep your business from failing?
The answer involves spending a minimum of 60 minutes a week, every week, with your finances. Most successful businesses have at their hearts strong financial intelligence, they are aware of the most important numbers at all times, and never operate in the dark.
In the book, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean, authors Karen Berman, Joe Knight and John Case speak about finance as being not only science, but art. They point out that having financial intelligence and the knowledge you gain from understanding the numbers, helps you make better decisions.
Numbers give us invaluable insights about a company—from the inside out. They can help diagnose what’s wrong, such as low customer renewal rates raising your customer acquisition costs. They send early warning signals of crises in the making, such as slowing sales. They help identify the need to prepare contingency plans, such as finding cash management solutions when costs are rising rapidly or cash flow is dipping seasonally. They can alert you to the need to adapt and change that flawed business model before it's too late.
Get to Know Your Business
You don't need to be mired deep in your accounting program (although having solid up-to-date accounting records is essential to getting reliable numbers). Financial intelligence is about seeing the entire picture of your business painted with the brush of key indicators and important financial ratios and trends.
Of course, numbers are not the only thing in a company you need for success. You need quality products and services, satisfied customers, motivated employees, competitive differentiation and more. But the right numbers will help you spot weaknesses and problems, so you can deal with the underlying issues. If you want to solve a problem, you need to correctly diagnose it first.
Read more articles on small-business financial management.