At SUBTLEGEND, we emphasize the importance of rightsizing your business before embarking on any scaling efforts. Many businesses fall into the trap of overspending or under-producing, leading to cash flow problems that can stifle growth. Our approach ensures that your business is financially healthy and ready for expansion. Here’s how you can apply this principle to achieve sustainable growth.
Assumptions: The Foundation of Financial Health
1. Stop Your Business from Eating Cash
The first step in building a sustainable business is to stop it from consuming cash unnecessarily. This means identifying and fixing areas of overspending or underproduction before attempting to scale. Scaling a business that isn’t financially stable can exacerbate existing issues and lead to significant losses. Rightsize your business by aligning your expenses with your revenue and ensuring that each aspect of your operations is cost-effective and efficient.
2. Take a Percentage-Based Approach
Your business is an ever-evolving entity, and a static budget won’t accommodate its dynamic nature. Instead of rebuilding your budget every time sales fluctuate, adopt a percentage-based approach. Look at your most profitable months and analyze the percentages of sales allocated to Cost of Goods Sold (COGS), payroll, marketing, and other major expense categories. Use these percentages as benchmarks for future financial planning. This method ensures that your expenses scale appropriately with your revenue, maintaining profitability during both high and low sales periods.
3. Trust the Numbers
Numbers don’t lie. Trust your financial data and use it to make informed decisions. Avoid the temptation to ignore or fight the numbers because you can’t change what has already happened. Instead, face the facts and adjust your strategy accordingly. By acknowledging past financial performance, you can make necessary changes to improve future results.
4. Small Changes, Big Results
Often, the path to significant improvement lies in making small, incremental changes across multiple areas of your business. Instead of seeking one big fix, focus on identifying and implementing minor adjustments that collectively lead to substantial improvements. Whether it’s refining your marketing strategies, optimizing production processes, or improving customer service, these small changes can add up to big results over time.
Practical Steps for Financial Management
1. Stay Up-to-Date on Your Books
Maintaining accurate and current financial records is crucial. Ensure that your books are always up to date so you can make timely and informed decisions. If you’re not already doing this, start immediately. Up-to-date financial records provide a clear picture of your business’s financial health and are essential for effective management.
2. Build a Strong Relationship with Your Accountant
Your accountant should be a trusted partner in your business. If you don’t have a good relationship with your current accountant, it’s time to find a new one. Share your financial analysis with them and work together to achieve your business goals. A competent accountant can provide valuable insights and help you navigate complex financial challenges.
3. Operate on Accrual Accounting
Accrual accounting provides a more accurate picture of your business’s financial position than cash accounting. It recognizes revenue and expenses when they are incurred, not when cash changes hands. This method gives you a clearer understanding of your profitability and financial health, enabling better decision-making.
4. Access to Financial Statements
Ensure you have access to three key financial statements: the Balance Sheet, Profit & Loss (P&L) Statement, and Statement of Cash Flows. These statements should be available for comparison by month and by year. Regularly reviewing these financials helps you track performance, identify trends, and make informed strategic decisions.
At SUBTLEGEND, we believe that rightsizing your business is a critical step before scaling. By stopping unnecessary cash consumption, adopting a percentage-based approach, trusting the numbers, and making small incremental changes, you can build a financially healthy and sustainable business. Maintain up-to-date financial records, cultivate a strong relationship with your accountant, operate on accrual accounting, and regularly review your financial statements to ensure your business is ready for growth.
Remember, successful scaling starts with a solid financial foundation. By following these principles, you can achieve sustainable growth and long-term success.
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