The statistics are mind numbing.  In North America, 80% of all small businesses started this year will be gone in 5 years.  Of the lucky 20% to have survived for 5 years, another 80% of those businesses will be gone in 10 years.  That’s a whopping 96% failure rate in 10 years!

Would you start a small business if you were told that you have a 96% chance of failure?  Not many people would.  But every day, hundreds of people think they will beat the odds.  They may be former employees, students, housewives, or others who have never had any business training, but are sure that their product or service is so fantastic, so completely unique, that they are destined to succeed. 

These are the people who walk through the doors of my accounting and consulting practice every day.  They want to know how to make a lot of money, how to leverage their business, how to go public.  I begin to talk to them about how they plan on bookkeeping for the business (oh, my wife will sort all that out), what is in their business plan (oh, I’ll pull one of those together if the bank is looking for one), and what their break even point is (we don’t have to worry about any of that; this product is going to sell millions!).  They want to fly before they’ve learned how to crawl.  They do not understand that business management is a separate skill from doing what it is that the business does.  For example, hairdressers think that because they are good at cutting hair, they can own and manage a salon.  Lawyers think that because they are good at putting together a brief, they can run a 10-lawyer law practice.

Does it sound like I’m being hard on small business?  Not at all!  Small business is the engine of the world economy.  Even Microsoft and Ford started in someone’s basement or garage.  What gets me angry is that people all over the world have been given an idealized and unrealistic view of how to operate a business and most discount the importance of the basics.  With the advent of bookkeeping software like Simply Accounting and QuickBooks, many entrepreneurs believe that these programs will magically do the bookkeeping for them.  Because they lack basic accounting skills, they are unable to analyze their business results and have no idea what’s working and what’s not.  It’s like driving a car in a foreign country where you don’t know what the road signs are telling you.

How do you perceive your business right now?  What is it there for?  If you are a shoemaker, you might say that the purpose of the business is to provide shoes to customers at a reasonable price.  But that’s not what we mean.  That is your company’s positioning strategy.

The underlying purpose of any business is to make money for its stakeholders.  Who are the stakeholders?  The investors in the company.  In the case of small business, that’s usually the owner/manager, but it could include outside investors.

The only way for any business to make money is to increase its net profit, cash flow and return on investment at the same time.  But what’s the difference between these three things?

Net Profit
Net profit is simply what is left after you have deducted all of your company’s expenses from its revenues.  There’s really nothing you can do directly to net profit, because it’s only what’s left over.  You can, however, increase the revenue or decrease the expenses, which, in turn, increases the net profit.

Cash Flow
Cash flow represents all the cash that comes in to your business minus the cash that goes out of your business.

Cash comes in from such sources as cash sales, the collection of accounts receivable, new borrowings or investment, and cash received from the sale of equipment.  Cash goes out of your business to pay your accounts payable, make debt repayments, purchase new equipment, and distribute profits to the owners.

Return on Investment
Return on investment (ROI) is the amount of net profit the business makes as a percentage of how much money the stakeholders (remember that the stakeholder is usually the owner/manager) have invested in the business. You could have invested your money in a GIC or the stock market but you put it into your business. This calculation tells you how solid an investment your business is.

Managing a small business may be one of the most difficult things you ever do in your life. It takes knowledge, persistence and lots of sweat, but the rewards can be phenomenal!

- Angie Mohr CA, CMA
Managing Director
Mohr & Company Chartered Accountants
78 King Street North
Waterloo, ON N2J 2X4
ph: (519) 884-0017 f: (519) 884-4534
angie@mohrandcompany.com
www.mohrandcompany.com

 
Resources for the Growing Business
If you want to know more about financial management of small businesses, there are a wealth of resources available.   Here are some suggested references:

Canada Business Service Centres
Business information and answers to business related questions, government programs and useful tools such as a Start-Up Assistant, Business Planner & Small Business Workshop. www.cbsc.org

Business Enterprise Centre
"Business Enterprise Centre´s mandate is to encourage and contribute to the enterprising spirit and economic development of our community by assisting entrepreneurs with the development of new or existing businesses." www.bizenterprisecentre.com

Business Gateway.ca
This government of Canada website helps you find the government services and information you need to start, run and grow a business. businessgateway.ca/en/hi/

Strategis
Industry Canada´s "Strategis" site is "Canada´s Business & Consumer Site". It is full of excellent tools, information and helpful resources in the area of starting a new business, international trade, business financing, consumer rights, bankruptcy searches, patents and much more. strategis.ic.gc.ca

Performance Plus from Industry Canada
A great website for businesses from all countries. Shows you how your business stacks up with others in your industry. http://sme.ic.gc.ca

Inc. Magazine
On-line presence for this business magazine.  Here you will find great articles, tools and calculators to help your business grow.   www.inc.com

Visit Build Your Business on the Chamber web site at http://greaterkwchamber.com/build_your_biz.asp for links to dozens of other useful sites related to Business.

Must-read Books

There are literally thousands of books on every aspect of business from start up to management to marketing.  There are however, some books that have stood the test of time and, in my humble opinion, should be rendered dog-eared and tattered by every small business owner.  You can buy these books at almost any bookstore, or you can visit www.mohrandcompany.com  to purchase online.  Please note, these books are not in any particular order.

The e-Myth Revisited by Michael E. Gerber
This powerful book has changed the lives of hundreds of thousands of small business owners.  Gerber shows you that being able to do the things your business does (cut hair, design buildings, fly aircraft) does not necessarily mean that you have the skill set to manage a business.  He shows you how to work “ON” instead of just “IN” your business.

The Pursuit of Wow!: Every Person’s Guide to Topsy-Turvy Times by Tom Peters
Do you stand out from your competitors?  Do your customers say “Wow!” every time they interact with you?  Tom Peters shows you why it’s critical to excel at customer service to survive.

Built to Last: Successful Habits of Visionary Companies by James C. Collins
This book looks at companies that have stood the test of time and have not only survived but flourished while their competitors have fallen by the wayside.  Learn how you can structure your business the same way and ensure that it’s around a hundred years from now.

The 80/20 Principle by Richard Koch
This is the book that first showed us how 80% of our success comes from 20% of our effort.  Every business owner should read this to find out how to achieve more with less!