What is your balance sheet going to look like next year? The year after? What about three years from now? Do you care? Many times the answers to these questions are: not sure, no idea, don’t know and yes I care but I don’t have the information to properly answer these questions. It’s very typical for a small or medium sized business to not know what their financial statements are projected to look like over the coming year much less the next three years. Many times they will have a budget (that is usually inconsistent with their historical performance) but haven’t done the work to take the budget one step further and have it flow into an actual set of pro forma financial statements.
What are pro forma financial statements and why do they matter?
It’s going to cost how much!!! You must be crazy!!!
That comment is made by entrepreneurs and business owners after hearing how much it costs to borrow money from either a mid market or private lender. The comment is usually followed by a series of expletives that I won’t type here but needless to say the cost of capital is something that can scare or upset someone who maybe hasn’t thought through the opportunity cost (see past blog post here). There is no such thing as free money when it comes to business but more importantly the money your business is using has a cost to it that you may never have thought about but you might want to.
People use to be paid based on their daily physical output. How many widgets could they build? How many trenches could they dig? How many calls could they answer and reroute. There was a time not long ago when people were the machines that made a business work – actually work. Today life is quite different. Technology continues to erode the physical work that people do and has left a void that only people can fill. In the past people were paid based on using their body to undertake physical or manual labour but in the future people will be paid based on using their brain to think and manage outcomes. The real question is: how is your business doing more with people?
If can happen to a large company (see story here) it most certainly can happen to your company. Surprisingly, many businesses that have never been through a tough moment fail to appreciate how often this happens. I am referring to a company not really knowing its costs and finding themselves in a position where they have to work out of a tough position because they didn’t realize what they didn’t know. Understanding the costs for your business is one of the most important things to know outside of understanding how to generate revenue. It seems simple but in practise can be a challenge many businesses struggle with.
“…the loss of potential gain from other alternatives when one alternative is chosen.”
Running a business comes with an never ending series of trade offs and there are times when critical decisions need to be made that seem to have greater trade offs than what you may be accustom to. This can be particularly agonizing when a decision involves needing expertise that you may not have access to – like financing. When given an opportunity to profit from a decision that involves needing to find capital, often times entrepreneurs and business owners will either lean in and commit or miss the opportunity as a result of their lack of knowledge. Opportunity cost is a real concept that impacts many businesses but here are some things that might help you if you find yourself in a position where a gain to your business will involve being creative with how you find the capital to take advantage of it. Continue reading “What is opportunity cost?”→
A few months back our family bought a piano from a local piano refurbisher and after making several phone calls to book an appointment to have it tuned with no response, I decided to stop by the business to see if I could speak with the owner personally. I had met him when we purchased the piano and learned that he had been in business for more than 20 years. On this particular morning when I drove up to the front door it became obvious that the business had shut its doors as the space was empty except for the sign still displayed on the front of the building. Continue reading “It’s a sad day when you learn of a #failedbusiness”→
Funny how life works out sometimes. With no expectation at all I ended up having two meetings today: one with a consultant working for a company that is walking on the edge of a cliff and a second meeting with two friends that have recently decided to get into the subprime lending business. One meeting was full of worst case scenarios while the other was full of optimism and huge aspirations. The funny part is that while I enjoyed both meetings immensely I really enjoyed talking with the consultant about the business that is about to go over a cliff. Strange? Continue reading “One business goes over a cliff just as another one starts”→
This week Dylan spends time revealing how he learned to let go of customers he never really had in the first place as well as the personal lesson of realizing there are many different paths that a business can take to get to its goal. Dylan shares a conversation he had with someone who was recently fired and is considering starting a business.
“Capital support” is a term I use to figure out how a business can access the capital they need to support their activities. Many businesses owners wouldn’t consider “capital support” an item that they would specifically and intentionally address as they manage their cash flow the best they know how as capital is needed. Taking some time to consider the sources of capital that your business has access to can help you plan your cash flow and reduce the amount of time and effort spent trying to scramble at the last moment.
What do you think? Generally speaking, is Canada risk adverse? Many of my recent blog entries have detailed different aspects of Canadian banks and lenders being adverse to any kind of default risk which may have served us well during the last downturn but today may be responsible for minimal economic growth within the small business market. I appreciate that the TSX has demonstrated that it can raise risk money for oil and gas but what about other industries? Is there a general sense of “no risk here please” in Canada?