I was sitting in a local chamber of commerce meeting this past February where the discussion topic was how to attract more young employees into the workforce. The businesses in this local community were having a particularly hard time finding people to fill all of the hourly wage jobs available. At the end of every meeting, there is an open forum where business owners can bring up topics to discuss with the group.
A business owner brought up the concept of seasonality and asked if any of the other owners had ideas about how to deal with the cash flow crunch felt during their offseason. A lot of owners brought up some tried and true ideas such as different marketing tactics and how to better handle employee costs during this time. Honestly, none of this was groundbreaking until the owner of a local nursery spoke up about the tactics he employed.
A nursery as you can guess has slow winters. While there are not many people planting flowers in the winter, the nursery is generally hard at work both growing and gathering inventory. As a result, their expenses only see a minimal dip during their offseason. What results is a master’s class in budgeting.
This particular owner said that he managed his business from his bank account. However, he also had a 9-week cash flow forecast that he always completed every Monday. For 15 years he had used this method and found that it got rid of a lot of the stress that many owners in his industry faced in the offseason. He didn’t go into much more detail, but during the socializing after the meeting, I approached and asked him I could learn more. I told him what I did and assured him that I was not trying to sell him my services. Rather, I had a particular fascination with how small businesses managed their money.
Two weeks later, I met this nursery owner, let’s call him Roger, for coffee. Roger explained to me that he had taken over the nursery when the former owner and his wife retired and moved to Arizona. He had been with them for 5 years, mainly more involved in the operations side. When the previous owner approached him with a plan to transition the business over a few years, he was excited because it meant he would be able to take over the ownership role over a period of time.
Much of the training was on the operations of the business. There was some on forecasting customer demand, but very little on the accounting. The owner’s wife was the bookkeeper and suggested working with a local accountant going forward. Three accountants later, Roger decided he needed to devise his own system.
Roger was not interested in looking through QuickBooks reports, even on a monthly basis. He was very in tune with their point of sale system and looked at reports almost daily about what was and wasn’t selling. These reports also included inventory balances so he could make quick adjustments. However, as for the rest of the business, he managed it out of the bank account. When there was enough money to pay bills, he paid them. When money was tight, he sat on bills.
Roger still had an accountant, but now he would provide everything once a year in February and a tax return would magically get done a few weeks after. It was a very transactional relationship. Roger was happy to have his taxes done, and quite frankly didn’t have the time to hear about how the accountant thought his business could improve.
This continued for several yeas until Roger grew “profit frustrated” (my words, not his). Roger couldn’t believe that with all the time, effort, and stress that went into the business he was only the 4th highest-paid employee. When taking his distributions plus payroll, he was somehow only the 4th highest compensated employee.
The problem was, Roger had no idea where to start looking at how to fix this. Prior to his job at the nursery, he sold seed to local farmers for 3 years. While Roger was educated with a degree in Agricultural Business, the two accounting classes he had taken were more because he had to take them then he wanted to. Besides, at this time, those classes were 12 years in the rearview mirror and he couldn’t remember anything from them.
Much like the people at the chamber of commerce meeting, Roger found himself asking others for help. At first, he was guarded with what he was asking for. However, he had a particular sit down with one of his suppliers who he had developed a better relationship with. During this talk, Roger started to explain some of the issues he was going through, specifically that there never seemed to be enough cash around. “I didn’t understand”, Roger said, “I paid taxes every year so I know there was profit, however, our cash flow always felt like it was so tight”.
The supplier mentioned he had a similar background as Roger. He had hired an operations manager who came from an accounting background. The operations manager had devised a plan that they had been using for the past several years which eliminated their issues. Further, he had begun taking home more money with essentially the same amount of sales. After assuring he wouldn’t try to poach this individual, a meeting was arranged for Roger to learn more about this system they were employing.
At this meeting, Roger learned that rather than fighting the habit of managing his business from his bank account, he should just set up a system to be successful with it. Roger didn’t need to change his habits and start to review his QuickBooks file daily. That was good news to him because he had tried that before, with the habit never sticking. Rather, Roger needed three pieces of information and a dedication to completing his new system every Monday.
The operations manager explained that she would sit down with a complete listing of accounts payable balances, a 9-week cash flow worksheet, and their bank balance each Monday. Using this, she would project out there cash in and outflows for the next 9 weeks. This would take some getting used to, as you needed to know your sales trends. Occasionally she would get into their system to look at historical weekly sales. She would also need to know upcoming expenses, such as payroll, rent, and other supplies expense. While she might only have one utility bill, she would need to project the next two for her sheet. She would need to do this projection for other expenses as well.
While initially setting up this system was time-consuming, the time commitment quickly lessened. She could begin to “roll” her forecasts so that she was essentially just fine-tuning the first 8 weeks and adding the 9th week.
Roger started blocking off 2 hours every Monday from 10 to lunch to complete his projections. What happened was amazing. At first, Roger was scared because his projections showed that he would be out of business in week 6. However, he slowly began managing his payables better, eliminating unnecessary expenses, and better staffing his business. Month by month, his profit began to grow. After 9 months of this new system, Roger was now the highest-paid employee.
I asked Roger, “Why did this method stick when nothing else did?”. He said it was because he didn’t have to alter much of his normal process to complete it. He always managed his business from his bank account and loathed the idea of getting into QuickBooks. This system didn’t change any of that. He was also used to planning out materials and other items for his business, so the 9-week projections didn’t phase him. Lastly, he told me something else….the operations manager who he promised not to poach, came to work for him as a “side gig”. During the first 6 months of implementing his new system, she was working for him for a few hours a week to make sure things were going smoothly.
As Roger explained now, he had his “own people” who did much of this for him. He now meets every Monday afternoon with his bookkeeper and general manager to review the forecast and gives his approval. They have changed things such as payment schedules with vendors, collection practices on commercial accounts, and how often they do check runs all based on this system. While Roger acknowledges that most accountants wouldn’t appreciate the system, it works for his business.
A Few Thoughts to Ponder
What Roger stumbled upon are a system and a plan. In a recent survey, Intuit found that only 26% of small business owners budget or forecast their cash flows. While a higher number said they do annual budgeting, I know from experience that most of the budgeting doesn’t get used after the final ink dries on it.
There is no way to reduce anxiety and stress and increase profitability without having a plan and system in place. Whether you, as a business owner, execute that plan or you have others do it for you, you must have a plan in order to have success.
Why do most businesses fail? Lack of planning. Businesses fail because of the lack of short-term and long-term planning. Also included in the top 10 reasons why businesses fail is poor management, lack of capital, lack of profit, and leadership failures. All of these go back to lack of planning and management of cash flows.
I often talk to clients about planning for profit. Having a profit strategy is something that every business owner should have. This strategy is not a one-time event, but an on-going system and process to make sure that your business is doing all that it can to be as profitable as it can.
Roger’s system, while not the most advanced, worked because he adhered to his system and it identified issues and brought solutions to the what was plaguing his business. While some accountants might have been able to point out to him to stretch his payables out, get rid of certain expenses, and collect from corporate accounts faster, Roger’s system did the same.
Whether your plans are to scale your business to 100 locations or have just your one location, you must have a profit strategy and system in place to succeed.
Krieger Analytics is a unique accounting practice that is looking to provide financial clarity for the business owner so they can accomplish their goals. We aren’t the typical accountant as we want to provide a high, more comprehensive level of service to you. We help you understand your past results and plan more for the future. Unlike most accountants, I am also a small business owner so I understand the issues you are dealing with. If you would like to discuss your business and see if we may be the right solution, contact us now.