On counting their money on the way home, the young men had US$200 exactly. Seeing that they did not make any profit, they sat down to find out where they had gone wrong. After hours of calculating, the two entrepreneurs came up with a solution: “We need to buy more melons!”
In one of the most inspiring business books ever written, The Richest Man in Babylon (George S. Classon), there is a story of a chariot builder and a musician who had worked very hard for a long time but had nothing to show for it. The two approached a rich man for advice on how they could also accumulate wealth. Arkad, the rich man, told the two how, after deciding that he wanted to succeed in life, he determined to do two things:
1. He would have to immerse himself and study wealth accumulation.
2. Once learned, he would follow the laws and do it well.
Arkad explained to the group that there were two types of learning. One was the things we learned and knew, the other the training that taught us how to find out what we didn’t know.
The aim of every business venture is to make a profit and accumulate wealth for the owner. The sad reality is that many business owners have no idea how much profit they are making in any given period. As long as there is money in the bank, one may think his business is profitable. A commuter transporter operator recently told me that he makes a profit of US$80 daily, or nearly
US$2 000 per month. When I asked how much he has left after accounting for his salary, licences, taxes, depreciation, repairs and maintenance, he just stared at me.
Regular cash inflows may make you think you are making a lot of money. It is only after years of operating that, like the chariot builder and the musician in the Richest Man in Babylon, you realise you have nothing to show for your hard work.
Although having a competent accountant who prepares your financial statements is good, it doesn’t let you off the hook. As the owner and driver of your company, the onus is on you to ensure the business is going in the right direction.
Financial intelligence starts with knowing how much profit you are actually making. This makes it necessary to maintain accurate records of your revenue and expenses. Monthly accounting reports are good, as they will tell you on time when you incur a loss so you can take corrective action before the situation gets worse. This may mean cutting down on some expenses, or jerking up your marketing to get more sales.
The reason why some entrepreneurs don’t really care about financial record-keeping is because businesses can run for some time while making losses, but not for too long. The foreign currency economy we are now operating in and the liquidity crunch in the economy make it difficult to cover losses for long. It is much better to cut the losses as early as possible if one is to avoid insolvency.
A key metric in financial management is the cash flow position. Running out of cash is probably the biggest killer of businesses. This can be avoided by regular cash position analysis and planning for any cash deficits in advance.
A succesful and growing business will have an improving cash and profit position each month. One of the important lessons in The Richest Man in Babylon is to put aside some of your profits and invest them for the future. That is how wealth is accumulated.
My commuter transport operator friend only realised how poor he was when the kombi was written off in an accident. With no savings or reserves to buy another vehicle, the man was back to zero.
Let’s all invest in financial intelligence in order to build sustainable businesses. A copy of the Richest Man in Babylon is available for free downloading at my blog http://chichoniip.wordpress.com.
If you want information on the Essential Finance for Entrepreneurs and Business Plan writing courses happening in July and August, as well as the 2011 Zimbabwe Business Plan Competition, please send me an email.
About the Author
Phillip Chichoni is a business planning consultant who works with SMEs and entrepreneurs.