Money Talks; Bullshit Walks

On Monday I wrote a post about reviewing business performance, and I got lots of great responses in the LinkedIn groups where I posted it as a discussion topic.  There were many different ideas about what metrics are most important, including customer retention, employee satisfaction, and marketing effectiveness. 

Each of these measures are helpful, as are countless others.  However, for startups and small business with limited resources the measures that matter most are financial, specifically cash flows and operating profit.  Customer and employee satisfaction don't matter if your business isn't profitable (and low prices and high wages might be what made them happy!).  Even effective marketing campaigns mean little if you can't afford to pay for them any longer. 

Businesses need to have their finances in order before they worry about other success factors.  No other measure matters if the company can't stay in business.  Without cash everything else is just bullshit.

Reviewing Business Performance

The first quarter of 2010 is now behind us, and it's time for businesses to look back and see how they did.  There are typical measures of success that many companies use:

• Did we make our target numbers?
• Did we do better than first quarter of 2009?
• Did we do well compared to our competition?

All of these are valid questions and can give a company insight into their business compared to their projections, their historical achievement, and the rest of their industry.  But does that really indicate whether or not a business is doing well?  Should you be pleased your company is doing a little better than others in an tumultuous industry?  Should you be upset if you don't achieve budget numbers that were overly aggressive?  Is it really smart to gauge year-over-year success compared to the worst economic period in recent history?

As corporations report these types of numbers their shareholders will overreact as usual.  Good companies will see their stocks devalued because of slow growth, and share prices in a few mediocre companies will increase based on performing a little better than expected.

Small businesses, however, have the luxury of looking at the big picture.  Can you meet your short term obligations?  Do you have a product/service mix that satisfies your customer base?  Is your company well positioned for future growth?  These are the types of questions that monthly/quarterly/annual reporting should attempt to answer. 

Keep Yourself and Your Employees Well Informed

One of the things I like most about small businesses is that they can be much more flexible than larger companies.  There are fewer layers of management to convince, no board of directors or shareholders to placate, and far fewer regulations to consider.  Because of this fewer resources are wasted on generating mountains of reports and a never-ending series of meetings.

But some reports and meetings exist for practical purposes.  All companies need to have insight into their business.  Every business should be able to answer some basic questions:

• Are we making a profit?  
• If we are not yet profitable are we doing the right things to become profitable?
• Do we have enough available cash to run our business?
• What are the amounts in our Accounts Payable?
• What are the amounts in our Accounts Receivable?

There are countless other questions that should be asked regularly.  Most large businesses so this automatically as part of their month end closing process, and small businesses should do the same.  It is important to do this every month to catch problems early and ensure that the company is moving in a productive direction.

It's equally important to make sure everyone in your company knows how the business is doing.  While you don't necessarily want all employees to have full access to your financials (unless you have an open-book management policy), make an effort to let everyone know about your successes and failures.  A quarterly or semi-annual meeting with everyone is a great way to keep employees informed, and it can also be an forum to receive valuable feedback.

Funding a Small Business in a Slow Economy

One of the biggest challenges for any small business is funding.  What is the best way to infuse your business with the cash it needs?  Current economic conditions make it difficult for anyone to get a loan, but small businesses take a larger hit than their larger counterparts.  An article on CNNMoney.com tells how banks have cut an additional $1 billion in loans available to small businesses. 

Bank Loans- There are fewer loans available to small businesses, but this can still be a viable option.

Venture Capital- Venture capitalists are taking full advantage of banking's reluctance to fund small businesses.

Government Loans and Grants- The government has several loans and grants specifically for small businesses.

Each of these can be a good way to get the cash your small business needs, and if you are able to secure funding you can find some great deals while interest rates are still low.