Business Management

The Main Reason Most Businesses Fail and How to Avoid It

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Portrait of a concentrated Asian accountant at her workplace using her calculator. Concept of accounting in business.

As our headline indicates, there is one primary reason most businesses fail: Running out of cash.

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This happens to businesses at all stages and must be carefully guarded against by you, the owner, at all times.

You might say, "I have plenty of money in my account, I have nothing to worry about." But is the money in your account actually yours, or is it lender's funds that you really shouldn't be touching?

Here’s the scary part: You and you alone are responsible for making sure the company does not run out of money and have to fold. If you have to tell your employees that you have to shut the company down because you have failed to make sure you are profitable or used the money foolishly, then that is 100% on you.

You are also responsible for your marketing and sales to get people in the door. You may have employees taking care of those duties for you, but you are ultimately responsible for bringing the money in the door to make sure you stay in business.

Related: The Essential Importance of Cash Reserves in a Crisis

If this scenario happens to you, your employees will go out and find another job (I’m sure they will be sad and upset, but they will have to), but you will have to make a major turnaround and start a new business or go to work yourself.

If it doesn’t scare you that you might have to take orders from a boss, then I don’t think you’re a real entrepreneur. If this scene is out of your worst nightmares, and you want to make sure it never happens to you, then you need to make sure that you safeguard every single penny that comes into your business.

Now that I’ve scared the living daylights out of you to make sure you see the ramifications of not safeguarding your hard-earned money, let’s dive into the importance of making sure you know your numbers.

Know Your Numbers

Portrait of attractive hardworking businesswoman with Afro hairstyle busy doing paperwork at office desk, working through finances, using calculator and making notes in her notebook with pen

How do you make sure you can safeguard your business against going under? The first big step you can take is to know the numbers of your business inside and out. Do you even know what numbers you need?

Do you hate numbers? Do words like P&L, balance sheet, data, KPIs, bookkeeping, CPA, accounting, and reports, make you want to run away and sell something, so you don’t have to think about numbers? A lot of entrepreneurs feel this way, so don’t worry that you are different or that no one has been in the same boat before.

One of the worst feelings in the world is not being prepared. Maybe you have to give a speech at your REIA, or you have to create a pitch for a lending opportunity, but you have a sinking feeling because you are not adequately prepared for the speech or the pitch. Thus, when you actually give the speech and pitch, you are not at peak performance.

If you are adequately prepared and have a system for how you give a speech or how you create a lending opportunity and present it, you are a lot more confident and perform a heck of a lot better.

Not knowing your numbers is the equivalent of giving a speech that you have never once even thought about and have to give to a group of peers. You’d be standing up there stammering and stuttering or making something up without any idea of what you were saying.

Not knowing your numbers brings confusion. Confusion disables action, whereas confidence enables action. Knowing your numbers in your business gives you the confidence and clarity to make faster, better decisions.

Find Peace of Mind

If you know your numbers, you can sleep better at night. Even if things aren’t exactly where you want them, having the knowledge of where you are will help steer you in the direction you need to go to be more profitable. You can also have the peace of mind that your books are being taken care of and that you have everything up to date.

Create a System

Knowing your numbers doesn’t happen by accident. You don’t just wake up and say, “Today, I’m going to know my numbers!” Put a system in place to gather those numbers and have them spit out to you in a timely fashion, and in a way, you can interpret them. If you know your numbers, then that system is a great benefit to you.

note_investing_systems

Make a Path to Wealth

Dan Kennedy, the marketing genius and mentor to millionaires, has this to say about numbers in his book No B.S. Ruthless Management of People and Profits:

“…here’s a fact from my 30+ years of doing marketing consulting with business owners: those making the most money, especially those growing businesses from small to big and getting rich by doing so, know their numbers inside and out, thoroughly, completely, and just can’t be stumped by a numbers question. Those who can be easily stumped are usually poor or headed there.

The fact is, in 30 years, with well over 1,000 clients, those who’ve made the most money and gotten wealthiest are the ones who know their numbers inside out, upside down, backward and forward, minute by minute, day by day.”

Related: Want to Make Money? Then Understand How Money Works! Here’s Your Complete Guide.

As you can see, knowing your numbers is really the difference between creating the business you always dreamed of and wanted versus ending up like every other entrepreneur who is struggling, stressed, overworked, and underpaid. You are not in business to survive another day. You are in business to thrive, and knowing your numbers helps you on the path to be a thriving entrepreneur.

Your numbers tell a story. If you don’t know your numbers, you don’t even know your own story. You don’t know if your story is an Oscar winner or a Razzie winner. A savvy investor can look at the numbers in your business and see if you are a healthy, profitable company, or if you are another entrepreneur barely keeping their head above water.

Know your story so you can either change it or add to it with purpose.

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How do you make sure you’re staying on top of your accounting?

Tell us what strategies you use in the comments.

David Richter is an active real estate investor, who has been essential in closing over 850 deals over the last seven years. Those include wholesale, turnkey, BRRRR, owner finance, rentals, lease o...
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    Tim Parker Investor from Bremerton, Washington
    Replied about 1 month ago
    You have to be ruthless with your numbers! If you know your numbers, you know if you're headed in the right direction and how fast you can get there. Knowing your numbers will keep you from making BIG mistakes.
    Ramez Takawy
    Replied about 1 month ago
    As a beginning, and somebody who fears numbers, I don't really know what you mean by "numbers." Maybe the answer to my question is simpler than I'm assuming, but can there be a simple explanation by what "numbers" mean?
    Angel Dominguez Investor from Sarasota, FL
    Replied about 1 month ago
    Sorry, I replied to the article and not to you: From performance metrics like how many customers, new customers, marketing conversion ratio to inventory valuation, sales and all other numbers on your financial statements. Sometimes there are qualitative metrics that may not seem as obvious as quantitative (financial statements). This is a very superficial overview that does not encompass all "numbers". For an employee knowing your numbers is like how many hours a week do I work, what is my rate of pay per hour or week or month? How does this translate to annual pay? What was my pay last year? Did I get a raise and now make 3% more than last year? Am I making enough to meet all my monthly living expenses and what percentage of my monthly income does car gas take up? Again, a simplistic overview regarding "numbers" being everything going on that will allow you to make an informed decision to continue moving your business forward as an efficient profit making system and avoiding costly mistakes. Does this help?
    Angel Dominguez Investor from Sarasota, FL
    Replied about 1 month ago
    From performance metrics like how many customers, new customers, marketing conversion ratio to inventory valuation, sales and all other numbers on your financial statements. Sometimes there are qualitative metrics that may not seem as obvious as quantitative (financial statements). This is a very superficial overview that does not encompass all "numbers". For an employee knowing your numbers is like how many hours a week do I work, what is my rate of pay per hour or week or month? How does this translate to annual pay? What was my pay last year? Did I get a raise and now make 3% more than last year? Am I making enough to meet all my monthly living expenses and what percentage of my monthly income does car gas take up? Again, a simplistic overview regarding "numbers" being everything going on that will allow you to make an informed decision to continue moving your business forward as an efficient profit making system and avoiding costly mistakes. Does this help?