A CFO points out financial data on a tablet.

How to Improve Your Business’ Financial Health

Do you fear your business is underperforming? Perhaps your financial wellness check showed some weakness? Improving your business’s financial health is a great idea, but it’s not always easy to know what to do and where to start. Add on the fear of meddling with the wrong thing, making the situation worse, and it’s no surprise most business owners opt for trying harder: selling more, working faster, and doing more with less.

But sometimes, trying harder just makes you run out of gas faster.

As a fractional CFO, I’ve worked with dozens of struggling businesses – some have made it, and some have not. Based on my experience, here is my financial advice for business owners looking for a successful business turnaround or simply a tune-up.

KPIs are the symptom, not the diagnosis.

Metrics indicate where issues may need investigating but do not provide a comprehensive analysis of your business. Therefore, before trying to improve your business’ health, you need to first analyze what’s causing the issue.

Drill into the raw data behind your financial ratio to pinpoint the driving factor. You will either discover the root cause or learn that the issue is an outlier that can be ignored.

I once had a client worried about his current ratio dropping below 1.0. Upon analysis, we determined this was due to an increase in deferred revenue as more customers purchased annual contracts. This change was overall good for his business but looked bad through the lens of current ratios.

If you do find concerning data points, double-check them against other data sources, like a variance analysis. Talk to your front-line employees to hear their subjective opinions on the matter. At CFOshare, we call this approach the “Gemba walk” after the proven LEAN manufacturing technique.

If you are unsure how to perform this financial root-cause analysis, consider contracting CFO services to assist.

Business financial health = processes + mindsets.

Business models set the stage for many elements of financial health, such as your working capital cycle or product-market fit. However, your team’s mindset can significantly improve or degrade financial performance. I see two common mindset problems in small businesses that hurt financial performance. 

The Startup Mindset Problem: Revenue is About to Take Off.

I have worked with several startup clients burning cash and expecting revenue to catch up “in the next 2-3 months.” Like the signs at bars that say “free beer tomorrow,” the next 2-3 months often never come. These founders can’t let go of their growth vision, but holding on to that revenue ramp is a sure way to crash the company. 

To avoid this problem with my clients, I hold business owners accountable for missing their growth goals, forcing a confrontation of their failure. This is difficult consulting work and usually results in anger towards me, but I feel saving their business is more important than saving an entrepreneur’s ego.

The Lifestyle Mindset Problem: Spend It While You Have It.

Lifestyle businesses commonly face a different challenge: using their cash balance to drive spending decisions. If the money is there, they spend it. If the money is not, they do not. 

For example, one of our clients was a seasonal business that spent all its cash on investments and employee bonuses in the high season only to find itself borrowing high-interest MCA loans every slow season.  

Another of our clients was an e-commerce company that sold large equipment on consignment. The client routinely drew cash that should have been saved for paying his vendors, creating recurring cash crises.

“Spend it while you got it” is an instinct from the hunter-gatherer era (better eat that bison before the wolves get it!) that only hurts us in modern business. 

Businesses like this need budgeting, forecasting, and expense control processes to discipline the business owner. These are the best practices that fractional CFOs use to improve business finance.

Other business finance issues.

I’ve encountered dozens of bad processes and mindsets that hurt business financial health. Rather than write an encyclopedia on how to do a business turnaround, I suggest contracting professional CFO services to analyze YOUR business’ condition. These may include:

  • Undercapitalized business
  • Low gross margins
  • Mispriced products or services
  • Poor cost control
  • Fraud or embezzlement
  • Excessive owner draws
  • High debt service
  • Excessive leverage
  • Toxic management culture
  • Overpaid key employees
  • Underperforming managers
  • Poor marketing 
  • Low client lifetime value
  • Obsession with perfection

Improving your business’s financial health.

Improving health begins with identifying the root cause. An outsider most easily achieves this – either a board member or Fractional CFO – who can see the situation clearly without bias. Work with this person to identify the root cause, develop a plan, and hold yourself accountable for the solution. 

If you want CFOshare’s assistance with your business turnaround, get in touch with us today.

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