4) I Know Everything I Need by Looking at my Bank Account Balance

It’s amazing how many times I’ve heard this!  Sure, your bank account balance is important, but you can’t manage your business effectively without additional information.  If your balance is getting higher, does that mean you’re more profitable?  Maybe it just means more of your bills are going unpaid, or you’re collecting on more of your past due receivables.  Maybe it’s just a reflection of better payment terms extended from some of your bigger suppliers, or maybe a vendor misplaced a large check you wrote, and you’ll be in deep trouble when they find it and cash it.  A declining bank balance could mean declining sales, but could happen just as easily during strong growth, when you’re spending more on materials to meet increasing demand.  The bottom line is that the bank balance by itself means very little.  To make effective decisions, it must be considered in conjunction with the changes shown in your other assets, liabilities, sales, and projected cash flows at a minimum.  Spend some time getting to know your balance sheet – it’s got your bank balance on it, as well as information on all of your other assets and liabilities.  Once you get comfortable with it, you’ll find it’s twenty times more helpful than your bank balance alone.

5) Watch All My Expenses, I Don’t Need a Budget

When it comes to budgeting, there are only two types of business executives.  One type uses self-adjusting budgets and regular budget variance reports to manage profits at a peak level, and the other type doesn’t understand exactly what this type of budgeting is or what it can do for your bottom line.  Which type are you?

6)      I Can Fix Anything By Increasing My Sales

This is the BIG ONE.  It incorrectly assumes that all sales are profitable, and that all financial problems are related to income.  Think about this for a minute: In the US, most people that win a lottery are broke before they win, and they’re even more broke after they win!  If being broke was an income problem, then the additional income provided by winning the lottery would fix the problem, but it never does.

Don’t get me wrong, increasing sales is usually a great thing.  But if your sales are driving revenue to increase by 20% per year, and your costs are increasing by 40% per year, you’re on the fast track to financial disaster.  Increasing sales will not help production issues, quality control problems, logistical errors, customer satisfaction issues, or a host of other problems, and in most cases, increasing your sales will make these problems worse.

Don’t put the cart before the horse.  As long as you have a reasonable level of sales (maybe not enough to reach your current break-even point, but enough to reach a reasonable break-even point) you need to work on your profitability first.   It’s a lot easier, and less expensive, to do this now and increase sales later than the other way around.

Link to part 1 of this post