Money problems aren’t always finance problems

/ Financial Literacy / By

If you think about the flow of actions during the course of running your business, we can start to see that often, money problems in business are not a finance problem. Think about it: you start with the two pillars of your business. Your product or service, and the customer. Without one of these, there is no business. Marketing is the process of making your customer aware of your product or service. Operations is the process of delivering the product or service to the customer. Finance is the money that comes from the customer to keep the whole business afloat, and make it possible for the business to continue operating and to keep producing the product or service.

If we look at this process as a whole, we can see that the money in the business is the very last step of the business machine. The money in the business is just the easiest thing to count. It’s the end result, and many business owners would say it’s the main reason they run their business to begin with. BUT you can see that anything can happen throughout the whole process to interfere with the way the business machine should run, and it may go unnoticed until you get to the money end of the process. All of a sudden there’s not enough.

Example of what is NOT a finance problem

Sarah’s bakery has a break even point of $3000 in sales per week. The overheads are all accurately established, the gross profit per item is calculated using industry benchmarks, the feedback from customers say that the retail prices are good. Her customer service is top-shelf, the customer has a good consistent experience each time. The quality of the items made and sold are fine. But Sarah is not meeting her sales targets. Is it a finance problem? She’s done her costings, she’s very disciplined in her expenditure, and her liabilities are all a reasonable % of the net assets. Is it an operations problem? The products being delivered to the customer are done as promised, it’s a good experience, and her customers are very happy and keep coming back. Feedback is received and documented, and she makes any necessary changes based on the feedback she receives.

The problem is in the marketing process. She just doesn’t have enough customers coming through the door and buying. The amount of marketing she needs to do is determined by a lot of things – for a start, it needs to be effective and predictable – but ultimately, once she has found the marketing method that works for her, it just needs to be multiplied and amplified until she has reached her sales target. Otherwise, it’s really clear to see that by constantly falling short of her targets, she’s not going to last very long at all. It won’t matter if she raises prices, cuts costs, gets a loan, or introduces a new product line. The problem is in the marketing, and nothing will work until that’s fixed.

Here’s another example: 

Dave is a mechanic. He’s run his workshop for over 10 years. He has a really effective marketing strategy that has new customers coming in all the time. He has established what his break even point in, has set sales targets to reach his anticipated net profit, and has really good control over his costs and overheads, everything should be ticking over nicely. But there’s a problem. He’s losing money in having to do a lot of warranty work. Turns out, the mechanics are rushing through the work too quickly, and missing some basic things which then go wrong, the customer comes back, he has to fix the problem for no extra charge, but the annoyed customer never comes back again.

This is an operations problem. It won’t be fixed with another marketing campaign or tighter control on the budget. It needs proper systems put in place to have each mechanic work through a checklist to make sure nothing is missed. It means Dave needs to book the jobs with enough time to get them done properly, and not put his staff under pressure to cut corners. Or perhaps look at employing another mechanic to be able to service the demand that he’s getting. Once he has a clock-work system going to improve the quality and consistency of the work being done, he’ll find that his warranty costs will significantly drop, and his profits will be back where they should be.

So, when is it a finance problem?

Let’s look at Kathy, who runs a fashion retail shop. Everything looks good on the surface. She has great marketing, getting lots of new and returning customers. She has a high standard of personal customer service, and her customers are always very happy. She responds to feedback straight away, and is always looking for ways to give them a great customer experience. She has money coming in, no problem at all.

But she has not kept watch on the cost prices, they have crept up over time, so she’s not making as much gross profit as she used to. On top of that, her overheads have also been creeping up, so the reduced gross profit is impacted again by a reduced net profit. But, worse than either of these problems, the funds that she takes as drawings from the business has become unsustainable. The reduced profits can no longer afford to sustain the amount of money she’s taking from the business. And, if that wasn’t enough, she has not sufficiently prepared for the tax bill, and so she gets a big bill at the end of the year, and she hasn’t got the money to pay for it. It’s not looking good for Kathy!

These are all elements of finance problems. Not keeping control of your costs or expenses, placing too much pressure on the business to cover personal drawings, and not maintaining your statutory obligations. This is when you need to look at the finances to be able to fix the business.

Looking at these three examples, you can see that while all of these businesses had money problems, only one example was actually a finance problem. You have to really look at what’s going on to be able to determine where the breakdown has occurred. If your answer to every money problem is to raise the prices or cut overheads, you’re not solving anything. To find where something isn’t going right, you can compare it to your business plan to see where the biggest variation is, and if you don’t have a business plan, then I’d suggest that’s a really good place to start! Chefs use a recipe, builders use blueprints, and manufacturers use the product specs to create the same result every time. Your business is no different, a living business plan is critical to ensuring that the control and direction of the business is in your hands.

Bronwyn
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