This is the 5th and final installment in our series about “The 5 Key Success Factors of Business.” Today we want to give insights into what the world’s best companies do regarding finances – which includes various physical assets such as money, facilities and equipment.
As a reminder, the 5 Key Success Factors are:
- Strategic Focus (Leadership, Management, Planning)
- People (Personnel, Staff, Learning, Development)
- Operations (Processes, Work)
- Marketing (Customer Relations, Sales, Responsiveness)
- Finances (Assets, Facilities, Equipment)
Here’s what the world’s best companies do for Success Factor No. 5, Finances:
- Competitive pricing is maintained to ensure customer value. In some market sectors such as luxury automobiles, high prices may be advantageous in signaling to the buyer that the product is truly superior and worth the higher price. But in general it is important to keep your pricing on par with what your competitors are charging. If competitor pricing is not readily available, such as on their websites, you might need to hire a “mystery shopper” to contact competitors for quotes.
- Sophisticated financial controls monitor cash flow and ensure profits. Many entrepreneurs manage their finances with their checkbook, as they do their own personal finances, but this is not best practice for small to midsize businesses. It is better to have a complete accounting software program operated by a trained bookkeeper or accountant to make sure your cash flow is adequately strong and that you are actually making profits every month. Even if you have sales and income, that does not mean your income exceeds expenses, yielding a profit. And some items like capital equipment may be expensed differently from routine expenses such as office supplies. Again a skilled bookkeeper or accountant can help you monitor and analyze this with reporting at least once a month.
- Top management understands and tracks key financial data. It won’t do you any good if you leave accounting to the accountants. Cash flow problems are one of the main reason small businesses fail. At least once a week get a timely “snapshot” financial report from your accountant or bookkeeper such as accounts receivable (who owes you money) and accounts payable (who you owe money to). Once a month you need an updated income statement showing whether or not you had a net profit for the month, and tracking all expenses in case something gets out of line and creates issues. If you have no financial management experience, get your financial person to explain what the numbers mean or learn about it online, or buy and read a well-rated book on amazon. Basic financial expertise and number-tracking is essential for business success.
- Pricing is modular and flexible so customers have choices. I’ll never forget a favorite client telling me, “Don’t show me just one suit on the rack and expect me to buy.” Most customers want options so they can make informed choices and feel in control. For any proposal consider offering price points that are low, medium and high, and explain the differences. Also if you have a high-dollar project you’re quoting on, consider breaking it down into sections or modules with individual pricing for each. For example we’ve often found it helpful with large projects which are hard to quote upfront due to lack of details, to instead start with a low-budget analysis-planning process whereby you work with the client to flesh out the details, then your estimate will be more precise and the project will go more smoothly.
- The real costs of products/services are known so real profits are achieved. Unfortunately just knowing your overall monthly profits is not sufficient to know which products or services were actually money losers or money gainers. Breaking all services down to specific projects allows more accurate tracking of income vs. expenses for each project. Detailed tracking of product costs and sales is also very worthwhile. Typically 80% of the profits come from 20% of the products/services, so it’s very important to know what parts of your business you want to expand and what you might cut or stop offering.
- Each employee understands how his/her performance impacts profits. In many organizations employees have an overt or covert “us versus them” attitude toward management which can lead to behaviors which are unprofitable or worse. At the opposite end of the spectrum is the open book approach whereby management share virtually all financial details with employees so they fully understand. A moderate approach would involve first analyzing how each employee’s performance does impact profits, then explaining that to each one. On top of that add some kind of reward or incentive for contributing to profitable sales or operations, and the results can be dramatic. Sharing this information in some form with each employee helps them feel included and part of the team, while enhancing their professional development and learning.
- Financial rewards are aligned with results – not just longevity. As noted above, when individuals, teams and the company as a whole are rewarded based on actual financial results, the right behaviors are reinforced and tend to be repeated. Giving people annual raises regardless of performance does not reinforce behaviors that are financially beneficial for the company, and may have the opposite effect.
- Sufficient earnings are retained to balance out economic cycles. If the company spends all its profits as the come in, or pass them on to company owners such as with an S Corp., there’s nothing left in the company when down times come. For many reasons the economy goes through up and down cycles. If it’s up now you can be sure that a down cycle will follow in the not-too-distant future. A good practice is for company owners or shareholders to draw out just the money they need to live on, and save the rest. Ideally put some in an interest-bearing financial instrument or investment portfolio and not just leave it in the bank, given currently low interest rates.
- Facilities and equipment are adequate for the work to be done. Worn-out, shoddy or out-of-date facilities and equipment tend to lower morale and productivity. They can also make a poor impression on customers or prospects who visit your facilities. With rapidly developing technology, it’s important to keep hard assets and equipment up to date and in good repair. Downtime can be costly and in the long run cost more than regular upgrades. This doesn’t mean everything has to be top of the line, just good enough for the work to be done and for people to feel good about their work environment.
- Each employee has the tools he or she needs to do their jobs well. Beyond corporate facilities and equipment, each employee needs up to date hardware, software, systems and applications to do their jobs well. Again this is very important for morale, enhances productivity and profits, and makes a more positive impression on customers and prospects. Treat you employees the way you would like to be treated, for best results.
How does your company stack up using these financial-management criteria? Think about it. Then contact the Lawrimore team at 704-332-4344 or use the contact form right on this page for a free discussion about improving your company’s financial performance.