Left Brain Right Brain - Financial PerformanceWhy 'left brain' and 'right brain' people need each other.
It's sad to see Aussie icon Lisa Ho Designs go into Voluntary Administration. An article in The New Zealand Financial Review by Anne Hyland, prompted me to come up with some observations around financial performance and a ‘high level’ checklist to avoid this experience.
The key message here is the need for teamwork between ‘left’ and ‘right’ brain people. Lisa Ho is evidently a ‘right brain’, creative person, with a loyal following amongst clients and the fashion industry. Whilst Lisa was described as ‘business savvy’, what appears, to have been missing, was ‘strategic business’ planning and implementation – the ‘left brain’, resilting in poor financial performance.
Here’s the list of what went wrong and how it could have been avoided:
1. Accounts a mess – one person can’t keep everything ‘in their head’. Financial Accounts need to be accurate, timely and understood by stakeholders. A qualified and experienced person needs to be responsible for results. Where large sums are open to fraud, double checks should be in place to uncover issues quickly, so action can be taken to recover funds.
2. Credentials of anyone in management must be researched – especially where they have opportunity to commit fraud.
3. When required to inject personal funds – owners should question why, and the payback period. Thinking like any outside investor, should ring alarm bells that fundamentals need to be addressed, rather than ‘papering over the cracks’ with cash injections.
4. Stock and materials ordering needs to be run in conjunction with sales demand. A good ERP system can overcome this. Stock that is unnecessary for sales should stick out ‘like a sore thumb’.
5. When times get tough – as should be seen by trends in financial reporting – it’s necessary to consider the strategy. It could be time to overhaul the business model. e.g. depending on the owner’s energy levels – it might be time to consider downsizing and offering personal consultancy services or culling down to a more manageable number of clients.
6. Cash is King’ – this must be the first consideration. Cash is the ‘lifeblood’ flowing through the veins of any business and anything that slows it down needs to be examined and managed. Stock levels, supplier terms and overheads seem to have been issues not managed. You need more than a bookkeeper – someone who can read financials and understand the ‘big picture’ and impact on the near and long term future of profitability and cash flow.
7. Separate entities running on their own merits is vital, and risk issues considered and managed. e.g. if one business is so affected by the downfall of another, this is poor risk management.
8. When things get tough, sit down and consider the realistic outcome and take ego out of the equation. This is very hard to do when it’s a ‘high profile’ business, but one that can avoid a catastrophic personal outcome for owners. i.e. instead of trying to find ‘band aid’ solutions from outside investors, spend time considering the reality of the situation. And don’t underestimate investors by thinking they will share your emotional connection – it’s ‘cold/hard’ business results they want.
9. If you truly want an investor/financial backer be realistic about their demands and if you can be accountable to them. The financial benefits may far outweigh the emotional negatives.
10. Don't get lulled into a false sense of security where funds/credit are provided on a ‘non commercial’ basis. There may come a time where this ends and you need to come up to scrutiny from a more commercial provider.
11. Where there are various divisions or outlets in a business, these need to be reported on separately. You need to know which ones are profitable and which ones are ‘dragging’ down the results. Each division needs to stand on it’s own merits. This is simple to achieve with good accounting systems that are properly set up.
For your better financial performance:
- - Get your accounts into shape – not just for compliance, but for day to day management.
- - Check people out thoroughly who are in positions where they could be tempted to use your money for their own private purposes.
- - Don’t keep piling money into the business without asking questions like “when will this business be sustainable?”
- - Have good ERP systems for managing operations and stock ordering.
- - Regularly review your business model and strategy.
- - "Cash is King"; manage Revenues, Pricing, Costs, Overheads, Customer payments, Supplier Payments, Stock movements, job management, interest and tax payments.
- - Report in detail on all aspects affecting profitability especially divisions/branches.
- - Be realistic when things are trending downwards – leave your ego at the door and consider your options.
- - Be realistic about outside investors and their expectations and your own limitations in working with them.
- - Stand on your own ‘two feet’ re capital injections and be ready if ‘friendly’ funds are withdrawn.
- - Regularly review ratios and results to identify trends, such as;
· Gross Profit Margin – Gross Profit/Sales
· Net Profit Margin - Net Income/Sales
· Current Ratio – Current Assets/Current Liabilities
· Inventory Turnover – Cost of Goods Sold/Inventory
· Return on Owners Equity - Net Income/Owners Equity
This article has been provided by CFO On-Call.
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