This week I am giving a keynote address talking about “Emotion and Money” at the Prairie Capital Summit in Fargo, ND. I have 10 minutes to share some money in business insights on what has taken two decades and thousands of hours to understand. As I reflect back upon my presentation and the key points I like to make in a short time frame, I arrive at a very simple insight that can offer the biggest impact.
Observe.
Yes. Observe. And specifically, observe without judgement.
Money is emotional. It provides angst and excitement among the vast majority of human beings. The emotional roller coaster is more pronounced when people “have everything on the line” and most entrepreneurs have “been there”.
Emotions run high when money is at stake - especially for entrepreneurs that are making a bet that their product and service will provide handsome returns.
When was the last time that you looked at your cash balance? Debt balance? Mapped out when you expect to receive money (accounts receivable) and have to make payments (accounts payable)? As the business owner, are you doing this or relying on your accountant / bookkeeper / CFO? Do you know what your cash conversion cycle is? Does that term send shivers down your spine as you're not quite sure what a “cash conversion cycle” even is?
If accounting, finance and money is not your strong suit, no worries. It doesn’t need to be. However, if you want to get your company (or maybe even your personal finances) less fragile, then here is a simple way to do so.
Observe. Begin with Tiny Habits of checking account balances weekly, or better yet, daily. Don’t take action. Just take a few minutes every day and look at them. As the days pass, jot down some notes on what you are observing, what questions you have, what makes sense and what doesn’t. Observe the fluctuations in balances for 90 days.
Why 90 days? Because for most businesses that will capture most accounts receivable and accounts payable cycles. If you have a business with longer cycles, consider observing for 180 days. If this is not enough, consider finding a different business model!
After your period of observations (and do make sure it is after), then reflect upon:
Are policies on billing and collections in place?
If so, are they being followed to the T?
What is the frequency of bookkeeping? Real time, daily weekly, monthly or worse?
Your goal is to set into motion granular policies on accounts receivable (invoicing and collections) and payables and be accountable to these policies. Ideally you want daily or even real-time bookkeeping. This may seem daunting, but anything longer than daily deteriorates the value of having actionable information in which to make business decisions. For cash conversion, I will have to save the details for another post, but the punchline is that it is the time that it takes to convert the money you are spending to get sales into cash.
In summary, you can win the finance game through a mere investment of a few minutes a day observing. When you have observed the fluctuations of key balance sheet items like cash, inventory, accounts receivable, accounts payable, then you have the foundation to execute your plan to make finance work for you.
What are your views on making fuzzy math more clear? Share your thoughts in the comments or ping me directly at: patrick (@) hillcapitalcorp.com