If you’re reading this then you’re probably looking for business turnaround initiatives to help you turn your failing business around. If so, you’ve come to the right place! Business Fixer is a business turnaround blog chocked full of business turnaround tips to help you get your business back to where it needs to be. In this ‘Business Turnaround Initiatives’ series, I’m going to start with the area of Finance. Sound good? Let’s dive right in!
The Business Triangle
I view every single business through the Business Triangle. Simply put, every business (no matter who you are) has 3 core components:
- Sales & Marketing
Every single business has these 3 core elements. Every business has to have a finance function of some kind; every business has some form of operations and every business needs sales and marketing. Other departments such as Procurement, Manufacturing, R&D are business-specific – but they don’t exist for every business. When every business is stripped back, Finance, Operations and Sales & Marketing are at the core.
Therefore business turnaround initiatives must be around these 3 core areas. Usually, when I set business turnaround initiatives, I start with these 3 core areas.
Business Turnaround Initiatives – Finance
Now we understand the 3 core areas, let’s now look at the area of Finance. Below I’m going to show you what the business turnaround initiatives for Finance need to look like:
1. Know Your Numbers
In a previous post, I talk about understanding your starting point i.e. the economic health of the business. Your first business turnaround initiative must be to study the 3 financial statements and understand what story they are telling you. If you aren’t strong in Finance then have no fear! These links will give you a beginners guide to each one:
The Profit and Loss (P&L) tells you how profitable you are. The Cash Flow shows you how well you move cash in and out of the business (getting paid vs paying out expenses). The Balance sheet shows you how much you own, how much people owe you vs how much money you owe to others. The net result is your net worth as a company.
Whenever I talk about understanding the economic health of your business I use the analogy of a doctor. Wouldn’t it be weird if you went to see your doctor and rather than doing some investigation, they randomly prescribe you something? They haven’t done any digging to see what the problem is, they’ve not asked you any questions, they’ve not looked through your medical records; they randomly tried something and hoped it would work.
Unfortunately, this is what many business people do in a turnaround situation. They randomly try to fix a problem, but if they took the time to sit down with the financial statements and figure out what’s going on, they could use their time more effectively and prescribe a fix that is suitable as opposed to random.
2. Paint A New Financial Picture
Now you should have an idea of what’s going on. If you don’t like the financial picture you see, paint a new one. Painting a new financial picture is all about asking good questions:
- What do we want our average monthly gross profit to be?
- What EBITDA do we want to see per month/quarter/year?
- How much surplus do we want every month to be comfortable?
- How quickly do we want our customers to pay?
- When do we want to pay our loans off?
- What do we want the Shareholder Equity to be in 3 years?
Can you guess which financial statement each question relates to? Here are the answers:
- What do we want our average monthly gross profit to be? – Profit and Loss
- What EBITDA do we want to see per month/quarter/year? – Profit and Loss
- How much surplus do we want every month to be comfortable? – Cash Flow
- How quickly do we want our customers to pay? – Cash Flow
- When do we want to pay our loans off? – Balance Sheet
- What do we want the Shareholder Equity to be in 3 years? – Balance Sheet
Did you get them right? If not, I would recommend you either re-read the links I’ve posted above or take advantage of this key resource – ‘Finance For Non-Financial Managers’ by Gene Siciliano. This book has helped me and many others to understand the basics of Finance and Accounting.
By asking good questions like these (which cover all 3 financial statements) you will start to paint a new financial picture for your business.
[KEY RESOURCE] Finance For Non-Financial Managers by Gene Siciliano
3. Set Financial Goals
The next business turnaround initiative in this area is to wrap some goals around the financial picture. A dream is just a dream. A dream with a goal attached to it will become a reality.
So now we have arrived at the point where we are adding some meat on to the bones of the Finance initiatives. These goals will be your main initiatives for the area of Finance.
I always advocate using the goal-setting formula set out by the Frankin Covey Institute in their amazing book ‘The 4 Disciplines of Execution’. I really recommend you check this post out on goal-setting using their formula. Here’s their goal-setting formula…
Move [X] to [Y] by [WHEN]
By using the above formula, you will be able to set clear financial goals for your business turnaround. For example:
- Increase gross margin from 52% to 60% by 30th September 2020
- Increase monthly EBITDA from £25,000 to £60,000 by 31st December 2020
- Decrease average time for customers to pay from 60 days to 45 days by 30th November 2020
- Increase average monthly surplus from £1,000 to £30,000 by 31st December 2020
- Reduce short term debt from £50,000 to £15,000 by 31st March 2021
- Increase Shareholder Equity from -£40,000 to £15,000 by 31st December 2020
Do you see how it works? Pretty clear right? There’s no room for ambiguity and that’s what I love about this formula.
[KEY RESOURCE] ‘4 Disciplines of Execution’ by Franklin Covey
The REAL Business Turnaround Initiative in Finance
I hope you’ve enjoyed this part of our ‘Business Turnaround Initiatives’ series. Finance is the most important part of any business (in my humble opinion). That’s why I’ve started with Finance. If you can get this area right, then things generally start to work themselves out. Interestingly, Finance should drive other departments. Usually, in a business, Sales and Marketing drive Finance i.e. S&M do some stuff and ask Finance to record their score. That’s the wrong way round! Finance should dictate to S&M what numbers they need to hit! If anything, the real business turnaround initiative is to change the mindset to this one – Finance set the financial picture and the other departments have to make that picture become a reality.