85% of the time that SMBs reach out to me, it’s for one of three reasons.

1. Their financials are too messy to paint a coherent picture of the business.

2. They’re looking to sell or acquire a new business, or they need support during the transition.

3. They’re growing quickly.

Working with clients in this capacity, however, often uncovers far less obvious sources of inefficiency in the business that restrict growth, cut off cash flow, and erode margins.

This week, I’ll dive into the 4 big ones.

Let’s get into it.

1. Poor Bookkeeping

If you don’t know your numbers, you don’t know your business. Simple as that.

And often, hiring a bookkeeping firm to fix this for you won’t cut it. That’s because most firms are incentivized to close the books and move on to the next.

Besides, getting your financials in order is just the first step.

Once you’ve cleaned up your reporting, study it until you can, at a minimum, clearly articulate your costs, time inflows and outflows, identify unnecessary expenditures, and estimate your tax obligations.

Without this level of visibility, you’ll miss out on the opportunity to price strategically, optimize cash flow, and lean out your operations.

You’ll also stop yourself from ever being able to sell or raise capital.

2. Lax Payment Terms

Most of my clients have set payment terms, but many of them admit to providing a degree of flexibility around when payments actually come in.

While seemingly harmless, lax payment terms tend to get out of hand rather quickly. One reason for this is that clients often take a mile when given an inch.

And unless you’re a high-margin business, the direct impact that this has on your cash flow can land you in dangerous territory before too long.

Yet even if you can afford to collect less efficiently, there are still a myriad of reasons why you shouldn’t. For one, quicker receipts offer a margin of safety for dealing with unexpected expenses as they arise.

Second, having cash on hand rather than stuck in A/R allows you to avoid taking on unnecessary debt to fuel growth. Third, failing to track and follow up on late payments invariably means leaving money on the table.

To see where you stand on this, track your Days Sales Outstanding (DSO) and Overdue Ratio. More on that here.

To lower your DSO and Overdue Ratio going forward, focus on stricter credit approval, update your payment terms so that they’re clear and consistent, and make sure that invoices are sent out quickly and for the proper amounts.

You might also consider offering early payment discounts and e-payment options. Additionally, incorporate payment reminders and follow-up on outstanding invoices into your team’s workflow. Doing so will allow you to stay ahead of collection issues in the future.

3. Keeping Your Team in the Dark

Most privately owned businesses keep their books closed to most of the team. But this is a mistake—especially when it comes to your salespeople.

Brent Beshore explained this best when he said, “If you are a 20% net margin business and your salesman provides simply a 5% discount—that salesman just gave up 25% of your net margin before even delivering on the work.”

This is not the salesman’s fault.

As an owner, it’s up to you to give your team the context they need to make the right decisions for the business. This can even be as simple as providing more targeted incentives if full financial transparency seems too daunting at this stage.

Aside from protecting your margins on the sales side of the business, sharing financials across the organization also allows employees at all levels to better support the annual plan. It not only helps them work with you when times are good, but it also gives them the confidence to stick by you when times are bad.

4. Inadequate Financial Planning

Forecasting, setting KPIs, and articulating organizational goals not only test your understanding of the business but doing so will also allow you to establish clear expectations with your team.

Without proper planning, growth becomes coincidental and haphazard at best.

A better approach is to first get specific about the outcomes that you’d like to see in the next five years. Then, list the resources you have available right now to reach those goals.

There might be some considerable gaps revealed at this stage, and that’s okay. The goal at this point is to focus on how you’ll use your resources—financial and non-financial—to get the business where you want it to go.

From there, you need to determine where you stand, how you got there, and where you’re headed over time.

This is done through a systematic analysis of current and historical performance, which will allow you to identify trends, plan for seasonality, and make any necessary adjustments.

Putting It All Together

Here are your top takeaways from this week’s post.

1. If you don’t know your numbers, you don’t know your business. Get your financials in order, then study them until you can at least articulate your costs, cash flows, unnecessary expenditures, and tax obligations.

2. Lax payment terms leave money on the table and can open you up to having insufficient cash on hand to cover unexpected expenses.

3. Keeping your team in the dark about the company’s finances is a bad idea for two reasons. First, it robs them of the context that they need to make the right decisions for the business. Second, keeping that information private during leaner times can lower your team’s confidence in and commitment to the organization.

4. Without sufficient financial planning, growth is disorganized and better attributed to luck. Proper planning involves an accurate picture of performance, clearly stated goals, a specific roadmap for achieving them, and buy-in from across the organization.

Hungry for More?

1. Follow me on Twitter and LinkedIn for daily content to take your business to the next level.

2. Shoot me an email with your questions or requests for what you’d like me to write about next.

‘Til Next Time,

Connor