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Is The Financial System for Your Small Business Just a "Virtual Cigar Box?"

Back when Yoda was just a mere wisp of a lad, I remember a newsstand where I would go to buy a newspaper for my Dad. The proprietor, who was the father of one of my good friends, had a unique way of tracking his money. Under his counter he had an old cigar box and in it he kept all the company's money for the day. When folks made a purchase, he put the money he received in the box. When a supplier made a delivery, he took money out of the box to pay for the delivery. Each night he totaled what he had left, tracked it in a copy book like the ones we used in school. He transferred the majority to a little safe he kept and, eventually, deposited into his bank. The rest stayed in the cigar box to make change and pay for any deliveries for the next day.

Pretty simple system for a pretty simple business. No employees. Low-priced/low cost products. He never tracked how much he made on newspapers, cigarettes, candy or gum. He didn't care as long as he was taking in more than he was paying out. Plus, in those days, there really wasn't any real cost-effective way for him to do that.

Today, many small business owners, with way more complicated business models, who have had the "cash is king" philosophy hammered at them, incessantly (including by yours truly), operate much the same way. As long as cash in is greater than or equal to cash out, things are good. And while, at the very basic level that is correct, the ability to track costs, and analyze revenues is critical to longer-term success. It's where a business most needs to grow up.

While most small business owners understand the very basics of accounting (revenue, expense, profit), few have strong financial backgrounds. At the outset of their business, they pick up Quicken or QuickBooks, establish some high level "expense buckets," and never pay it a second thought, tracking what comes in and what goes out. And while each of these (and other basic accounting) software products are pretty powerful, in effect, they operate the same way as my neighborhood newsstand, except their cigar box is virtual! They really have no idea what it really costs to acquire a customer or deliver and support a product. Worse, they have no basic data to know whether a particular product or service is priced properly and is making a profit. And worse yet, if they ever have even the faintest notion of raising outside capital or even applying for a loan, forget it! Not with those financial records!

If this sounds like you and you've been in business for more than a couple of years and/or have revenues of more than $500 thousand a year, it's time your business grew up, financially. Here are some critical recommendations to help you do that:

Hire a Bookkeeper

It's time for you to let go. Even a part-timer can help you get your financial records into a more orderly and professional context and set up more detailed revenue and expense categories to help you understand and track your finances. This will help you to not only know THAT you are making money, but WHERE and WHY.

Create a Rudimentary Cost System

Track labor hours by customer, product, project, whatever the key metrics are for your business, from you right down to the person who answers the phone. Attempt to assign supplier costs the same way.

Review Pricing

With better financials and better tracking of costs, see if pricing really reflects those costs as opposed to "thinking" that they do. A price increase for a poorly priced product helps you win twice. Higher revenue per product/service, higher margins.

Begin Forecasting

To help you better manage costs and growth, and based on your new historical financial recordkeeping, begin to forecast where you expect your business to be over some future time horizon. Start with quarters and work into years. This way you can begin to do more effective cash flow planning for seasonal disparities in revenue.

Managing and growing a business is more than "cash in" being greater than "cash out." It requires you to really know where that cash is coming from and where it's depth. Get rid of that "virtual cigar box," and get your financials working at the same level you are. Time for the business to grow up, financially!

"The Entrepreneur's Yoda" knows these things. He's been there.  May success be with you!


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