In the current economic downturn, small businesses everywhere are suffering and too many will tragically close their doors permanently. For many business owners, it’s been a sobering lesson: Ignoring the practice of reviewing your company’s financial metrics is a high-risk decision with serious consequences. Numbers tell the story of the health and well-being of your business. To make sound business decisions—and to be financially prepared for the inevitable economic crises that are out of your control—you need to be on top of the numbers that matter most.
We spoke with EMyth’s Board Chair and Owner Ilene Frahm and the company’s Director of Finance Pauleen Miller about how small business leaders can start on the path to controlling their financial destiny and, in the process, might even learn to love what their numbers are telling them (for better or worse).
Choose to be a metrics-driven company
Before you can even start building an effective financial management system, you need to make the decision to develop your company’s key metrics, to collect the necessary data and engage with what the data is saying about where you stand right now in relation to your financial goals. This is a mindset shift that starts with recognizing your unproductive beliefs about money, like:
- If I do good work, the money will work itself out.
- Finance isn’t my thing. I’ll leave that to our accountant.
- I’m too busy now to pay attention to the money that’s coming in or going out. I’ll get to it eventually.
These beliefs cause business owners to distance themselves from the financial realities of their business, and the opportunities for growth and financial health.
“Businesses suffer from the sins of omission, not the sins of commission,” Ilene says. “It’s the things we avoid or ignore that come back to bite us. Making the strategic decision to become a metrics-driven company means opening your eyes to reality, which is always a position of strength, rather than living in hope.”
Let the COVID-19 crisis be your wake-up call
Ilene learned the importance of creating a metrics-driven company the hard way—through adversity. In 1985, when EMyth was a year into a major franchise expansion, she and her then-husband, EMyth’s Founder and Co-Owner Michael Gerber, discovered internal theft. Their third partner—the company’s CFO—was using the company’s bank account “as his personal ATM machine” and overpaying his Finance team to buy their silence. He’d taken advantage of the absence of financial oversight systems—the checks and balances that would have made his actions impossible. By the time Ilene and Michael made the discovery, EMyth was seriously in debt. Ilene spent 1986 in Southern California, away from her family in Northern California, working to save the newly-established operations in Los Angeles, San Diego and Orange County. After completing her mission at the end of the year, she returned home to take on the responsibilities of CFO and lead the company through what became a five-year turnaround. That’s how long it took to make things right: to pay off what became $2M in debt and put the company on new financial footing. This experience gave EMyth a hard-won second chance and shaped Ilene’s approach to financial management forever.*
In the wake of the global financial crisis in 2008, EMyth lost 30% of its clients in a single month in early 2009. But the business was able to recover quickly because the financial systems in place gave Ilene and the leadership team the information they needed to make the right decisions for the company and the employees. Ilene told us, “We had to cut expenses pretty drastically—and that wasn’t easy—but we knew how much to cut to keep the company healthy, and when it was safe to restore investing in growth. My anxiety wasn’t even close to what I felt every day in the late 80’s.”
Similarly, the last several months have been challenging for EMyth as the current COVID-19 crisis has hit many of our small business clients. Fortunately, we’ve been able to navigate the loss of revenues relatively smoothly because our financial history taught us how to prepare for these events. Securing a Paycheck Protection Program (PPP) loan has also helped us through.
“I feel grateful for our cash position and the financial management systems that have made it possible for us to absorb this sudden drop in revenues,” Ilene says. “And, so much of the credit for our position today belongs to the financial managers I’ve worked with over the years to build the company’s financial foundation. This partnership is something I treasure.”
Develop a trusted relationship with your finance manager
To create a solid financial management system, it’s not necessary for a business owner to be an expert in finance. What a business owner has to have or develop is:
- Entrepreneurial vision, including a picture of a metrics-driven company.
- The ability to think strategically about how to achieve the company’s growth and profitability objectives.
- A financial manager—whether it’s a CFO or a bookkeeper—who can collaborate on financial strategy.
- Enough understanding of how money works in their business to be able to delegate rather than abdicate responsibility (e.g., preparing financial statements and budgets, generating metrics reports, performing banking functions, gathering tax-related documents for tax professionals, etc.) for the tactical work in finance.
The partnership Ilene has with her finance manager is essential to her leadership of EMyth. “Your finance manager has to be a skilled financial Technician, but also someone who you can communicate with honestly and openly. My relationship with Pauleen depends on my willingness to be vulnerable with her. I can’t hold back or she won’t be able to help me. She knows what I want, what I dream about, what scares me. That makes it possible for us to think strategically together.”
If you can’t let yourself trust your finance manager, you’ll send out signals about how you want your business to function that they won’t know how to interpret. “I can’t do my job in the way that I want to if I’m not allowed on the inside,” Pauleen told us. “I need to understand the Strategic Plan—I have to know what Ilene is trying to achieve and what she’s afraid might happen. Once I do, I can see things through her perspective and identify what will help her reach her goals. Otherwise, I’m just producing information and there’s no relevance to it.”
The more your finance manager understands you and your business, the more likely you are to receive the information you really need from them. They can play a critical role in educating you in finance, telling the story of your numbers and the narrative that makes your business, your vision and your decisions make sense to everyone who works for you.
Find the numbers you love so you’ll visit them regularly
Your financial statements describe the essential health of your business. As its leader, you need to review them monthly to understand the basic metrics they communicate: your revenues, gross profit, net profit and cash position. There’s plenty of other useful information in these reports but they won’t necessarily give you the most compelling information about your business.
According to Ilene, you need to go beyond your financial statements to find the metrics you’re truly curious about, the ones that seem most meaningful to you. “Beyond the basics, financial statements aren’t that interesting,” Ilene says. “Over the years I’ve discovered the numbers I can’t live without. They’re the ones I look at everyday, or at least every week, because they capture how my business is really doing and how to improve it. If I had a home remodeling business for example, I’d want to know how quickly my clients paid their invoices. It would give me a measure of customer satisfaction and tell me who might be passively dissatisfied. If I had a retail store, I’d want to know how many potential customers came into my store every day by hour and day of the week, what percentage bought something, and the average value of a sale. It would give me a measure of the effectiveness of my sales staff and raise all sorts of interesting questions about hiring, training and my hours of operation.”
A trusted finance manager can help you fall in love with your numbers by helping you narrow your focus on the key metrics that matter to you, and by showing you how they’ll help you make better decisions—decisions that will facilitate the growth of your company, improve customer satisfaction, and increase cash and profits.
Once you uncover your numbers, you’ll want to visit them regularly. Take the time to sit with your finance manager to understand different financial metrics. Then meet—at least monthly—to discuss what your business is telling you and to review how your actual financials compare to the projections you’ve made. “Depending on the situation we find ourselves in,” says Pauleen, “we may focus on different financial items—like trends or changes in revenue, margin or expenses—and we talk about any potential financial impact those changes may have.” By reviewing your numbers often, and using them to make proactive decisions about how to improve systems, standards, procedures or other organizational factors, you’ll continue tracking toward your business’ financial goals. In time, you may notice that your unproductive beliefs about finances have disappeared.
*Michael E. Gerber tells the story of this chaotic and often terrifying period in EMyth’s history in his bestselling book, E-Myth Mastery, HarperCollins 2005.