If you’re running a small business, your motivation probably has nothing to do with keeping a close eye on your current ratio (basically payables divided by receivables) or deciding whether you should operate on a cash versus an accrual basis (you’ll probably choose cash). I know that those kinds of issues were the last thing on my mind when I started up my high-tech ad agency a few years ago. And I think I’m typical of business owners. Architects set up a practice because they’re good at designing buildings, not because they want to set up a super-efficient billing system. Specialty retailers open up shops because they love what they sell, not because they want to minimize their tax liability on inventory.
Unfortunately, these pesky little issues can make or break your business — no matter how deep your expertise and how great your passion in your field. I know. To illustrate how treacherous these overlooked accounting details can be, I’ll share a personal horror story.
When my partner and I started our little shop, it was just the two of us operating out of our homes, and we had one tiny client. But before long we had an office, a handful of employees, and a client list that included one of the biggest companies in America. My main job was doing the writing and guiding the creative. My partner was our sales force, and he also handled the books — at least at first.
But on a quiet day just before Thanksgiving, I decided it was time for me to get a little more involved with the numbers. I needed to figure out if we could afford another writer, and so I set up an Excel spreadsheet and started plugging in some numbers from the accounting summaries I got every month and had always ignored. I typed in our basic expenses (rent, phones, etc.), our own salaries, and our employee salaries and benefits, and extended them over the next three months. Then, I plugged in our receivables based on the current projects we had in-house.
When Excel did the math for me, the bottom line was very easy to understand: We were going to be out of business in three months.
So, on Thanksgiving morning, when most people in America were either chopping up onions for stuffing or watching football on TV, I was doing “what-if” scenarios to save our business.
The problem was actually quite simple: We were paying ourselves way too much. Fixing that problem, however, was not so simple. We both had to make some painful cuts in our household budgets just to stay afloat. But it was better to make the cuts than to go under.
On the business side we switched to a new compensation system, with much smaller monthly salaries and much bigger quarterly bonuses – if the money for bonuses was there! And we decided I should be the CFO, a job which lasted almost 10 years.
This lesson isn’t about greed. It’s about paying attention to the numbers. If you don’t have a three-month projection of revenue and expenses, make one TODAY. And if you think you can’t look out that far with a meaningful degree of accuracy, do a best-case, middle, and worst-case scenario. And if you don’t like Excel, do it by hand with a calculator, or get someone else to do it for you. But whatever it takes, get it done. And do it again next month.
Accounting may not be your strong suit, but the strength of your business depends on running the numbers.
Coming next: How to get paid on time.