Pillar One for the success of any business
What is the number one rule for the success of any business?
This is pillar one. It is globally recognized. This is not my rule of the game, this is globally recognized as pillar number one for the success of any business, and it might be a bit different to what you think it is. And in fact, I would love you right now to think about what you think it is. Do you think it's sales? Revenue? (Which is obviously both really important to a business)
So, think for a moment, and while you think, I'm going to tell you something that my father once told me. He's a very successful entrepreneur in his own right. He once said to me,
"Jeannie, nothing big ever happens in business."
And what I took from that is that business success is not a series of exciting events. In fact, the most exciting stuff happens outside of work, right? We see our kids walk for the first time, that kind of thing. Sure, there's excitement and fun, right? Absolutely. But to be successful, to find success, to have a healthy profit and cash and be time rich, which generally are the three key elements to what you would say, "That's a successful business," that stuff comes less from the exciting stuff, which entrepreneurs often neglect.
And rule number one, not one of the exciting ones.
So we've had some time to think about what you think it might be. And as I said, a lot of people will bias into sales, which is logical, right? Because absolutely, you need to get sales to generate revenue to make the whole machine work. But sales on its own, the really important thing to remember is that a sale and revenue is not profit, and it is not cash. It's not cash until we collect the payment, and it's not profit until we deduct the cost of sales and all the expenses. So you can see how this stuff, it's not incredibly exciting, but it is pillar one for the success of any business.
So pillar one for the success of any business,
rule number one is actually up-to-date, accurate accounting records, and your accounting records are your bookkeeping, right?
So that is rule number one. Why is it rule number one? And what do I mean by up to date? So by up to date, I actually mean up to date pretty much all of the time. So for example, I run a bookkeeping practice, and we take care of lots and lots and lots of business owners' books and we keep them up to date generally weekly. So we have a spot in our diary every week that we reserve for each client to make sure that their books are up to date weekly. Now, the normal formula here, or the best practice formula, or the recipe for the bookkeeping working really well is that there is a collaboration between the business owner and the bookkeeper. So the business owner is putting their sales into the system. Let's say you're using Xero. So the business owner's putting their quotes in, putting their sales in. So the revenue figures tend to be real time, a hundred percent up to date. Sometimes, the business owner will also match up the payments that come through the bank feed to that sale, so sometimes the revenue is in real time, which is cash flow. Sometimes, they're going to ask their bookkeeper to do that, which means it could be up to a week behind. I guess what I'm saying here is that your books, ultimately, you should try and have them up to date within about a week, and some parts of your book, like books like revenue, should be up to date a hundred percent of the time, okay? There is a recipe for best practice bookkeeping, just like there's a recipe to bake a cake, and if you follow the recipe and you put the cake in the oven for the right time and all of that, you're going to get a nice cake. If you break the rules, if you don't follow the recipe, you're going to get a floppy cake, okay? And we definitely see that in my practice, where when our clients follow the systems we give them, when they follow the recipe, everything is so easy and beautiful and it works so well, right? So over to the reason that this is rule number one. So the reason for that is because
if your numbers are not up to date and accurate, then how are you judging your business' performance?
And by performance, I'm going to talk profit and cash, because profit and cash are like oxygen for your business. Once we've got profit and cash, then we look to pull time and purpose out, right? But without profit and cash, the business is going to dissolve anyway, so there will be no time and purpose. So when I talk about judging your business's performance, I am talking about profit and cash. Now, if you don't have eyes on your numbers, if you don't have up-to-date profit and loss, right? Revenue, expenses, total net profit, if you can't see that all the time, then...
What are you judging it on?
Well, in my experience, you are judging your business performance on the bank account. And that is terrifying. It is frightening, and I will explain why.
Your bank account has almost nothing to do with your business performance.
And if this is a bit like, "Say what?" it's okay. I suspect that if you are listening to this podcast, you are not a bookkeeper or an accountant. You don't have to be, okay? I don't need to be an electrician to switch on my lights at night, and I'm not going to go and learn anything about being an electrician. I'm happy for him to turn up, or her, do what they need to do, and I actually don't need to know anything about it. And so in a similar way, I do trust that the electrician knows the rules of the game. So if you trust that an accountant, that a bookkeeper, that a strategic bookkeeper knows the rules of the game when it comes to numbers in finance, then you can learn those rules of the game and you can apply those rules of the game. So no, your bank account will not tell you how your business is performing in terms of profit. It won't tell you a lot about how it's performing in terms of cash. So why? Let's dive into that a little bit more. So profit and loss versus looking at the bank account. In a really simple way, the thing that you need to know is that your bank contains money that has come in from revenue, but it also contains money that is going to be due to the tax office. So I'm in Australia, and as a business owner, we have to collect GST, we have to hold our staff's tax from payroll. We have to hold their superannuation. You've got supplier payments in there, you've got your end-of-year tax bill that's going to come from the part that you declare as wages, right? There are lots of things in that bank account that actually are not yours. Not all of the money in the bank account is not yours. So what we see happen to business owners that are running their business on the bank account, judging their business performance on the bank account, is they see money in the bank and they think, great, things must be going pretty well, and they spend that money day to day to live, and then some way down the track, six months in, 12 months in, 18 months in, they start to get this feeling in the pit of their stomach that something's not right. And it might be that they got a notice from the tax office, it might be anything that triggers it, and they start to realize, shit, I don't think I've put money aside for that tax stuff or that super stuff or that whatever it is stuff, right? And that, in a nutshell, is it, in terms of what goes wrong when you're running your business on the bank account. And oftentimes, we and I get business owners come to me that 18 months in, and damage is done, and they have fallen victim to thinking because there's a little bit of money in the bank account, that things are going along okay. And what happens is when we bring the bookkeeping up to date, we find that they have a whole lot of liabilities which... Again, you're a business owner listening to this podcast, sometimes that word liability doesn't always mean a lot. All I mean is the things, the money that you owe people is so high that it's very hard to trade out of. Now, that leads me, I guess, to shocking business failure rates, right? So 80% of all small businesses will close up shop within the first five years of trading, and this stuff, rule number one, the lack of up-to-date, accurate accounting records, is one of the big reasons, because
businesses just don't know what they don't know until it's all too late, and it leads to business failure.
So I'm wondering if I've convinced you yet of just how important up-to-date accurate accounting records are? And I guess what I would say beyond all of this is that back to, rinse and repeat, this is not my rule, yeah? This is one of the rules of the game. This is globally recognized as pillar one for the success of any business. Again, I think a lot of listeners would be thinking, "No, it can't be. It's got to be sales." So in another blog, I'm going to do a subject around understanding you. And entrepreneurs are creative people, and they do naturally bias into sales, okay? So it is natural for an entrepreneur to think that way, and sales are absolutely important. But just a reminder: a sale isn't profit. You have to deduct cost of sales, you have to deduct expenses, and once you start bringing on staff, don't even get me started. Now, before we jump into what to do if you're not up to date, what I want to touch on is that
you can only improve and optimize what you are measuring.
So it's just another really important reason to have your numbers up to date and accurate. If you've got your eyes on your numbers, that is absolutely step one. Once you're doing that, you can actually improve what you've got your eyes on, okay? And I mean, what we see in that space is phenomenal. I remember walking into a restaurant once that was really struggling, and I put my eyes on his numbers. Luckily, they were up to date and accurate, and within 15 minutes, I had saved him $100,000 a year. And this, saving big money when you pay attention to your numbers is actually a common tale. When my team and I sit down with clients and we actually spend the time to dive into their numbers, there are big, quick wins. Beyond that, we get little win after win after win. And in fact, what we love about that, which we call strategic bookkeeping. So for us, bookkeeping, we call Numbers 101, so that's the up-to-date, accurate accounting records. Strategic bookkeeping is where we do start to pay attention to those numbers, measure them, ask questions, which allows us to improve them and aim for optimal business performance, right? When we do that with our clients, what was a cost and a grudge purchase, right? Who wants to go and pay a bookkeeper? It's not a dinner out, it's not a fancy outfit. Ugh, it's a grudge purchase. But when you actually pay attention to your numbers and use them to improve your business performance, the money that you pay a great strategic bookkeeper actually ends up making you more than his or her fee, which is really exciting, and I've seen this in action for over a decade.
Perhaps I'll share a story about that with you after I tell you about the how-to, okay? Because I know this is really important. I always want to give you ways to take action. So if you're listening to this and your bookkeeping is not up to date, your numbers are not up to date, whether that's a month or six months or two years or 10 years, here's what I want you to think about doing, and as I do that, I'm going to refer to a little checklist I've got here. I love checklists. I love lists that allow us not to miss stuff, right? It's like back to business success is found in the rules of the game. There is nothing wrong with having a great process. In fact, it's critical, but I digress. Back to what to do about it. So I could give you some DIY advice, but I'm not going to, and the reason for that is, well, there's a few reasons. Number one, I have found in my well over a decade as a strategic bookkeeper that business owners, more often than not, stuff it all up, and rectification work is actually much harder than just bringing books that have never been touched up to date, okay? So the second thing is that your time and money is probably better spent elsewhere. So generating the revenue is really important. As a business owner, that's generally what you are going to be good at, and so I would recommend that rather than waste 10 times as much time as it's going to take a really great bookkeeper to bring your books up to date, you actually do your revenue generating activities, whether that's attending a networking event, building some strategic partnerships, sitting down and putting your database into MailChimp or ActiveCampaign and starting to keep in touch with your clients and make sure that you are taking care of the diamonds at your feet, whatever those activities are, that's what you are better placed to do. Okay?
So number one, I'm going to recommend that you find someone to help you.
Now, in terms of finding someone to help you, absolutely, I can put you in touch with our team or someone within my network, and I can match you up with someone. And the reason I'm going to say that is because catch-up bookkeeping work is actually specialty work. I've seen bookkeepers approach it like ongoing work, and the problem with that is that it will still get you a result eventually, but you'll have a massive bill and it will take ages. So the more behind you are, the more planning and strategy that's really required to ensure that it can be brought up to date fast with a specific goal in mind, which is usually just get it up to date and get those metrics in order.
So if you're not reaching out to me or my tribe, my team, my network, then when you contact or when you reach out and look for a bookkeeper, I want you to find out, ask them, how do you do catch-up work? If they go, "Well, I just do all my work the same," I'm going to say it's a bit of a red flag, okay? Because if you ask me that question, I would be able to boom, boom, boom, tell you exactly how we approach catch-up work, all right? And we'd plan and then we'd prioritize, ultimately, but there's a bit more to it than that. So next I'm going to ask you, if you are going to look at using an accountant over a bookkeeper, be a little bit careful. Accountants, actually, they often do catch-up work pretty well. They do ongoing bookkeeping generally shockingly, but I've seen a mix. Some of the worst bookkeeping that I've ever seen has come out of an accountant's office, and a great accounting friend of mine has a really good chuckle over that one with me because he knows that's true as well. So just know that going to an accountant isn't always optimal. Bookkeeping is generally done way better by bookkeepers, and accountants do the income tax, tax minimization. If they're a management accountant, then they do similar to a strategic bookkeepers, which is helping you optimize your business by using the numbers. But separate the tax accounting and the bookkeeping, okay? So that is the next thing. After that, just make sure when you choose a bookkeeper they are actually registered, licensed, experienced, and insured, because you're a business owner. This stuff, a bit like when I was talking about the electrician and I don't need to be an electrician to turn on a light, you are not a bookkeeper. This is probably secret business to you that you don't understand, and it's going to be hard for you to really understand their skills and experience. So just ask, have a look, see what the reputation is, see how much catch-up work they've done and do ask, are you licensed? Are you registered in Australia? That's registered BAS agent. Other countries, different rules. Definitely make sure you get some kind of service-level agreement document from the bookkeeper, so that they're as clear on what they're going to do as possible. Catch-up work can be a bit like a Pandora's box, so it's not always possible right at the beginning to tell you exactly what they're going to be in for. But in my practice, for example, we have a two-page document, because we've been doing it so long, that actually crosses bridges before we come to it. The very last thing I probably want to tell you is that to get the best result possible, if you're getting a bookkeeper to bring your books up to date and you've followed all that advice I gave you, okay? Please don't just grab the first bookkeeper you find and hope for the best. Please follow the rules, play to win, listen to what I just said, and make sure that you follow those steps. But lastly, if you find someone amazing at this stuff, like my team and I are, the best result you will get is from following the systems they give you, okay? So if I look at the people we get the greatest results from, they listen to me. They say, "Yes, Jeannie, you're the expert in this." They do what I've asked them to do, they collaborate with me appropriately, and life is easy, breezy, and it works. Yeah? The clients who want to do things their way, they want to bake the cake differently, they want to follow a recipe they've created when they're not the experts in this, they are the ones that struggle more, struggle to get there and it's more painful, and they end up having to spend more time and money, two of our most precious resources. So if you say to that bookkeeper, "Okay, what do you need from me?" And generally, for us, that's in our service-level agreement, right? So what do you need from me, and when do you need it?
Stay engaged, work with them really closely, turn up to any meetings that they ask you to turn up to, your job will get done so much easier, so much faster.
So lastly, I just wanted to share a story about a client from the very early days of my bookkeeping journey that I did dive in and do the strategic bookkeeping process, and the kind of results we got. So it was a very long time ago, and it was in the fitness kind of world, and this business owner was referred to me by an accountant. And at the time, she was losing, I think it was $10,000 a month. So about $120,000 a year was just bleeding out of the business, no profit. I got the numbers up to date and accurate, right? That part of it wasn't too hard in this case, did that. Then I went about working with that client to educate her around the numbers. She was keen, she was excited, so I would shine a light on those numbers for her. I also strategically rearranged the numbers. That's a real management accounting thing. So I'd shine the light on the numbers, and I would ask her questions about those numbers. For example, why did revenue go up in this month? And she would discover the marketing activity that she did, and then decide to repeat it. So that would go on the action plan. So this was about being able to measure and being able to improve. The other thing we were able to actually look at, well, what does optimal business performance look like for this person in this industry? And refer to industry benchmarks. So back to business success is sometimes boring, and I know this stuff might sound boring, but we were able to set meaningful targets based on what we know is achievable within that fitness industry. And then once we set those targets, and we were like, all right, so we've got a revenue target, we've got a gross profit target, which is the revenue minus the cost of sales, and then we've got a net profit target, once we did that, month on month or week on week, however long we worked together, we were able to continue to look at the activities that would increase revenue, look at the ways that we could reduce cost of sales, look at what was in the operating expenses, so that slowly but surely, we could reduce the operating costs, which would fatten up the net profit. Now, it took a year, little by little, improvements over time, but after 12 months, she was making $10,000 a month. So we were able to squeeze $20,000 a month more juice out of that orange, okay? So that was a quarter of a million dollar result. And I remember she said to me, "How did we do that?" Oh, it wasn't the exciting stuff. It was the day by day. It was one step in front of the other in the direction of success, and that's how you do it. So once your bookkeeping is up to date and accurate, that is the opportunity. The opportunity is to sit down and hold yourself accountable, or have someone hold you accountable, which is what we do. Hold you accountable to the numbers, to shine a light, to educate you, to get those numbers strategic, to help you set actual real meaningful targets, and then to look at how your actual financial results compare to the targeted numbers, and then just decide on the action you need to take to move the needle, to improve the profit. As I said earlier, massive big wins happen really early, and then the wins continue to happen over time, which lead to optimizing your profit and cash, and then you get the privilege of pulling time and freedom and purpose and lifestyle out of your business, which is what it's all about.
Some useful links:
If you're in need of bookkeeping services, connect with my team at Cloud 9 Strategic.