- Not understanding, or not preparing your financial statements properly:
Financial statements are a very important tool in understanding your business and gauging the health of your business. Any business in which the owner or manager does not understand its financial statements is trudging the path to failure.
In addition the financial statements must be prepared accurately and regularly following standard accounting procedures and conventions.
The learning point: Make sure your financial statements are current and accurate. They must also be prepared in a timely fashion preferably on a monthly basis (as a general rule of thumb the previous month’s accounts should be ready within the first 5 days of the new month). This way it doesn’t take to long before you realize you are losing money.
2. Holding on to loss making customers:
Some customers are a drain on the resources of a company. They make too many demands that are frankly not feasible, are costly to maintain, do not pay on time etc. However companies desperate for sales keep on holding on to these customers without realising they are actually making losses on them.
The learning point: Calculate the profitability of each of your customers and get rid of the loss making ones. With the freed up capacity you can better serve the profitable ones and potentially generate more business from them.
3. Not understanding your costs:
A lot of companies do not have a clear understanding of their cost structure or underestimate the importance of having a clear understanding of their costs. When you analyse your costs properly you discover those products or services that are bringing in profit and those that are just draining your business. The fact the business as a whole is showing a profit does not mean all the business lines are profitable. When you cut the loss making ones you will see your bottom line increase.
The learning point: It is critical you understand your costs, if you cannot analyse it then hire a competent cost accountant.
4. No organisational chart or clear reporting lines:
Can you imagine an army on the battle field with no clear lines of authority between the soldiers and the officers? Such an army is bound to lose the battle. It is the same with business organisations. There must be clearly defined reporting lines between the different positions/functions and each must have its own clearly defined areas of responsibilities. With this you know who is to do what and who to hold accountable when jobs to do not get done.
The learning point: Companies without a clear delineation of authority and responsibility is like a ship without a rudder. Such a business will lack a clear direction.
5. Not exercising enough control on expenses and not conserving cash:
Your profit at the end of the day is a function of how much revenue you made and the costs incurred in running the business. No matter how much revenue you make if your costs are more then you are going to make a loss. Analyse your costs and cut out unnecessary expenses that do not in any way benefit the business e.g. fancy cars, frequent trips that do not bring in business, lavish parties, expensive advertising that does not bring in additional sales etc
The learning point: Cash is the blood of any business, without it the business will collapse. Review your expenses and make sure you’re not wasting money on unnecessary expenses. .
