Back in February 2002, the then US Secretary of Defense, Donald Rumsfeld was famous for making us aware of the three known and unknown areas of decision making. The first, “known knowns” - things we know we know, for instance, I know how to balance my checkbook, the second, “known unknowns” - things we know we don’t know, for instance, I know I don’t know how to perform brain surgery and the third, “unknown unknowns,” - things we don’t know we don’t know. The things we don’t know that we don’t know are where our blind spots reside.
These known and unknown areas of decision making can certainly be applied to business and entrepreneurs with growing businesses tend to have 2 blind spots in common and if unchecked they lead to unforeseen cash shortages.
A couple weeks ago, I was fortunate enough to be invited to teach on the topic of financial report analysis training to the Minority and Women Emerging Entrepreneurs at the University at Buffalo Center for Entrepreneurial Leadership. My presentation was titled “Get your finger on the financial pulse of your company” and this class of 20 very talented entrepreneurs shared 2 hours of their time with me in a very engaging and productive class. Lots of great questions.
About a month before the class, I had asked their instructor - Alex to ask them to send to her their list of the top three most important priorities for operating and growing their business.
Their top three were:
Increase the client base
Create a greater variety of products and services
Get more organized
Not one of the entrepreneurs listed ‘understanding how to read their financial report’ or ‘forecasting cash flow’ as one of their three most important priorities. None of them. But that’s normal. Very rarely is it on the list because the need to understand how to read their financial reports is a blind spot, for most entrepreneurs, it’s an unknown unknown and unfortunately that blind spot grows as their business grows.
The most successful entrepreneurs tend to be what my mentor John Schenk describes as “functional experts”. A functional expert is someone exceptional at providing their service or product and not exceptional at handling the accounting functions or running a business as it grows.
One of two things tend to happen as the business grows, either the entrepreneur runs short of cash as they are forced to reinvest in equipment and inventory with the greater demand or they become terribly inefficient because of the second most common mistake (which I will discuss momentarily).
Many entrepreneurs experiencing growth in their company come to me for help and say something like, “Tony, I don’t understand. We are growing at an incredible rate. I’m generating more sales than ever. I’m working more hours than ever and I’m maxing out on my line of credit. Where’s the cash?”
Considering that the need to read and understand your financial reports is a very large “blind spot”, these entrepreneurs, these functional experts have no idea what to do or where to begin to solve their problem and that’s a very scary place to be. Everything is on the line, figuratively and literally considering their bank debt is usually guaranteed with their personal assets.
The second blind spot originates directly from the functional expert nature of being an entrepreneur. When an entrepreneur starts out, it’s usually just them - their solopreneurs, their on their own and they have to do everything from buying office supplies to marketing and sales to performing the service or creating the product. As the company grows and as every task to run the business becomes more time consuming, the entrepreneur puts even more hours in than he/she already invests and tries to keep up. That inevitably fails so they eventually and sometimes begrudgingly hire an employee. The entrepreneur waits too long to hire help and then fails to let go of many of the responsibilities they hired the employee to do.
Once they have the employee, they fail to unload all of the tasks that they should because they are so used to running the company the way they have from the beginning. So now they’re spending more money on payroll and unhappy with the results and complaining that the new employee isn’t getting the job done so the entrepreneur feels the need to micromanage the employee adding more work to the plate.
So how to avoid these blind spots?
Let’s start with the second one first. The reason why the company is growing is because you are great at what you do but you can’t be great if instead of selling and performing your service or building your product, you are doing tasks like entering invoices and updating the website.
You need to get back to your sweet spot - that spot that allows you to focus on what you do best every day, all the time. The way to get back to your sweet spot is to create an Energy Drain list. It’s very simple, get a notepad (or use an app). At the top, title it “Energy Drain Activities I Engage in”. Spend 2 weeks filling it out. Make sure you have this notepad with you so in the moment, you add to the list everything that makes you think, “this is energy draining”. Anything that is energy draining is most likely work that takes you from your sweet spot. After 2 weeks, take a look at all the energy drains and hand off as many as you can to your employee(s) and if you don’t have an employee, hire a part time employee or virtual assistant. Believe it or not, your energy drain is someone else’s sweet spot.
Getting your finger on the financial pulse of the company will take more time but it’s not difficult. I know from experience that many of you have taken financial review courses or read books on understanding financial reports only to be more confused. It is difficult and part of the reason it often fails is because the example reports that are used in the book or in the course are from some made up corporation or business. Those numbers, those reports are not relevant to you.
What I like to do is use your real financial information. It is far more relevant to you. Start simple. Print out a basic income statement for the current month include the previous month and add a $ variance and % variance column (every accounting system has the capability of printing this report). Then print a second income statement that compares 12 month rolling data. For instance, it’s February so you have just closed the month of January. Print out an income statement using the dates February 1, 2014 - January 31, 2015 and then select previous period, $ variance and % variance. Print them out and review every line item. I guarantee, you will begin to see and understand your company like never before. It’s a great first step.
Now if you’re interested, I have a step by step guide that walks you through printing these reports (along with the balance sheet) from Quickbooks. Email me at Tony@youretheexpertnow.com and ask me for it and I’ll send you a copy for free.
So now that you are aware of the two common blind spots, they are no longer in your unknown unknowns. Take what you have learned and move from your blind spot to your sweet spot.
This article was originally published on Anthony’s blog and shared on his podcast - www.youretheexpertnow.com.
And always remember that your business, is just that, your business. Don’t ever forget to keep the perspective. Your family, your health and your need to live a balanced lifestyle far more important. I hope you have a great day!