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Know your numbers

Why do businesses fail?

One of my favorite movie quotes comes from “Other People’s Money,” when Danny DeVito’s character comments that he was sure that the last manufacturer of buggy whips made “the best god damn buggy whip you ever saw.”

That being said, let’s assume you have a viable company in a stable market,  yet failure is a possibility. In general, businesses fail because of mismanagement — weak general management, weak financial management or weak marketing capabilities. Of the three of these, weak financial management takes the cake, because frankly, without money you cannot hire great management or pay for marketing.

When you begin a business, you will most probably establish a relationship with a lawyer and an accountant. With today’s technology – such as QuickBooks – you may opt to hire a bookkeeper or simply do the bookkeeping yourself. Whether you hire a bookkeeper or do the work yourself – you need to KNOW YOUR NUMBERS.

We had a client who had been working with a friend who claimed they knew how to use QuickBooks. They came to us for financial CFO advisory assistance that turned quickly into QuickBooks help. They just couldn’t seem to get ahead and did not understand why when they were collecting receivables and paying their payable there was no money left over.

One of the first things we learned in developing a business plan was the importance of a pricing strategy. Strategy infers that there is thought put behind the numbers. Strategy is defined as “a plan, method, or series of maneuvers for obtaining a specific goal. In this case it is profitability.

Depending upon your target market, the pricing strategy can either be to obtain market share through penetration, value pricing, meet or beat the completion, prestige or skimming. The balance between understanding the customer’s perception of the convergence of price and quality, and the lifecycle of the product or service should dictate the strategy executed.

Understand your operating costs and your required return, and you arrive at the target gross profit. Your gross profit is the accumulation of quantity sold and the economic unit’s gross profit. Gross profit is the difference between your price and your cost of goods sold or services rendered. Failure to understand this relationship is failure. How does that saying go…”If you fail to plan you plan to fail”.

Enough of the Business 101 lesson! Know your numbers; know your customers’ value of what you are selling and never stop looking at the strategy. As competitors enter the market and substitute products come on the scene, you need to have the ability to react accordingly.

Cash is king. Understanding your numbers is the only way to keep the cash moving in the right direction. Your financial statements tell a story, and if it is a bad story, the investors or banks are going to see it clearly. Whether you’re presenting to a team of investors or simply working to grow your business, it’s critical that you understand how much cash is coming in and out of the business.

There are some surprises. I would have never thought 20 years ago that people would wait in line for a cup of coffee that costs $4. If you ask those who do, they are not paying for coffee but the experience.

A well thought-out strategy matches the customer’s desired experience and the price.