Does it ever seem like your CFO and accounting staff speak a different language? In a way they do – they are focused on the language of numbers and dollars to assure your business remains profitable.
In nearly every organization a large gap exists in the communication between its operational and financial functions. In the vast majority of interactions between these disciplines the words spoken are often the same but the understanding and/or interpretation is quite different. It is the rare organization where that is not the case.
Everyone makes decisions based on whatever formal training they may have obtained combined with their cumulative experiences over time. There are certain lessons that cannot be truly learned without actually having lived through the issues first hand.
Business owners and top managers have an up-close and personal view of the financial realities and consequences facing the organization. If you are one of these leaders, you have a responsibility to make sure decisions at all levels of the organization are grounded in what I call a “Profit Mentality.”
A Profit Mentality means each member of an organization, from the top down, views every decision through a profit-oriented frame of reference. Without this grounding, many actions will be made based on arbitrary and often unfounded criteria. In this situation, the company is the proverbial ship without a rudder, drifting towards potential disaster. The only time you actually make it to any port is by shear luck and that is after quite a lot of floating aimlessly around the big blue ocean.
On the other hand, when you foster a Profit Mentality in your organization from the top down, you significantly improve the odds of avoiding the decision traps that exist in every business environment.
So how do you establish a Profit Mentality to fully exploit the profit potential of your business? Start by making sure everyone knows these three facts:
Cash is the Lifeblood of Every Organization: Although profits are defined as “a valuable return,” the reality is that you cannot actually “spend” profits, so you must have sufficient cash available to fund the company’s operations until conversion occurs. Since there is nothing tangible returned by profit alone, the logical conclusion is without cash conversion there is no REAL profit; therefore, it would follow that cash flow is the true profit indicator.
Profitability and Cash Flow are Inextricably Linked: You must have profits to produce cash and you must have cash to produce profits. The cycle cannot be broken indefinitely without seriously negative results.
There is No Free Lunch: There is cash required to purchase each item and it will have to come from somewhere (either from operations or other outside funding). Although the situation is somewhat fluid, the reality never changes: you must produce long-term profits to survive.
The manager’s ability to run a business by the appropriate numbers is crucial to the successful operation of any business. The degree to which this information is disseminated to all employees will be the key to success. Every staff member must be trained in profit management so that each decision, whether made at the management or front-line operating level, will be based on sound financial management techniques. The odds of success increase exponentially when every decision in the organization is made with this approach.
About the Author: Fred Parrish is Founder and Chief Executive Officer of The Profit Experts™, an affordable CFO service that helps small business owners improve their profitability and cash flow. He is also creator of The Profit Beacon™, a new app that provides predictive analytics to help businesses make smart and timely decisions, and author of “The Profit Mentality.” For more information please visit www.TheProfitBeacon.com.