The Basic Things You Need to Know to Run a Business

October 2006

I recently had a fun opportunity to speak to the Texas Nursery Landscape Association members. Quite a dedicated group of small business owners! The Home Depots and Wal-Marts of the world have changed the way business is done—and I was there to talk to them about using financial feedback to make decisions about how to proceed.

For them, I created a list of the things that you should know as a small business owner about your business’s finances. Let me share that with you this month as it applies to every business.

I will start with the basics—must-know info—and proceed through different levels until we get to GURU-level financial knowledge.

Please keep in mind that frequent and accurate financial information costs time and money… so being a GURU may be too costly and impractical.

Where do you fall on this scale?

Here is what you MUST know:

• How much it costs you to keep your doors open every month. These are the unavoidable amounts you can’t stop paying. To know this you need to know the:
• Cost of recurring expenses (rent, utilities)
• Cost of core payroll
• Cost of taxes, insurance, fees
• Debt obligations
• When these expenses occur during each month and year
• How much cash you bring in every week. To know this you need to know:
• How quickly your main customers pay
• Peak periods and low periods
• Where you can turn when the timing of cash inflows does not match the timing of cash outflows (in other words, what happens when you are broke?)

Here is the next level up—which I call Basic Knowledge:

• How much it costs you each month for unnecessary expenses.
• When these expenses occur (weekly, monthly, yearly? And which week, month, year?)
• How much profit you build into every project or product.
• How well each project or product performs against targeted profit percentages
• How often your inventory turns over
• How many days it takes each customer to pay
• How many days it takes you to pay vendors
• How much of your profit is consumed by direct project/product costs and how much is consumed by indirect costs
• Which costs can be sacrificed temporarily in times of cash flow crisis
• The key numbers that drive your business (units, projects, labor?)
• The financial information you need to run your business

Now for Advanced Knowledge… you should know:

• How to allocate overhead/indirect costs to each product or service to ensure profitability
• How to estimate the bid/price of different products and services to maximize profitability including the recovery of overhead (burden)
• How often equipment needs to be replaced
• Whether leasing or buying equipment is more beneficial
• How much return you are getting for amounts spent on capital equipment
• Which financing option is best for current growth projections
• What non-dollar metrics drive profits and costs
• What can be done to alter metrics and profits if they are going off track
• Which projects or products are profitable and which are dogs or loss leaders
• What is projected to happen not just this year, but five or ten years from now

And if you are really on your game—Guru Knowledge

• Activity based cost for each product or service
• Performance metrics linked to each project
• A budget that links the strategic plan to the budget and to performance metrics
• Hourly, daily, weekly monitoring of financial results
• Hourly, daily, weekly effective adjustments to correct undesirable financial results

Dell and the City of Austin are gurus. Dell and the City of Austin are huge and have folks dedicated to financial feedback systems full time.

Not even I, the super CPA (or the duper CPA as the case may be) am a guru. It is too expensive for me to have that sort of financial data—I would consider myself in the Basic category. And I am glad to be there.