After devoting just shy of 26 years in the Army, an institution often criticized for fiscal irresponsibility demonstrated by outrageous end-of-year spending sprees, the first thing I asked my chief financial officer was the rules for spending money. After Army retirement, I was hired by a large federal government contracting corporation as an executive to win, start up, lead and manage a $500 million contract for security services.
There was no incumbent workforce, and whatever I didn’t spend went to the bottom line and was of great interest to our board of directors. It was one of the largest contracts in the corporation’s portfolio, margins were good, and its duration was five years. Her answer was simple, “Spend it like it was your own.”
There’s a lot to unpack in those seven words, besides their straightforwardness! In her response, implicit was to invest wisely, spend judiciously, and understand there will be a reckoning with the board of directors, who represent the shareholders and their treasure, at the end of the year. Of course, there were corporate rules in place, governing the authority to commit resources. But her guidance went much deeper…philosophically, the board of directors expects key executives to safeguard shareholder resources.
The message was clear; the leader’s burden is to inspire their team to be fiscally responsible in carrying out their duties. It didn’t matter if a stock clerk was spending half dollars on pens for the staff or a business developer was investing thousands of dollars on a capture strategy for a million-dollar opportunity for the corporation. The leader’s job was to instill fiscal discipline in the team to invest wisely and spend judiciously and inspire them to appreciate they were spending someone else’s money but should treat it like it was their own.
In coaching small and mid-size businesses, we always start with a financial assessment. We ask, do you have a budget, and do you routinely evaluate revenue and expense run rates? Do you review your profit and loss statement at least monthly and quarterly, assessing progress toward meeting your annual revenue and profit goals? Do you have a financial forecast that goes at least two years out, and is it tied to the annual business plan and the multiyear strategic plan? Are the impacts of achieving goals reflected in the budget revenue and cost accounts? Have key performance indicators been developed to measure productivity and goal achievement? Do you have controls in place and defined signature authorities for increasing levels of financial commitment?
Answering these questions in the affirmative means you have a robust financial system.
But all too often, we see annual business and multiyear strategic plans absent or paid little attention to. The budget and any multiyear forecasts are outsourced to a bookkeeper or accounting firm. No formal process exists to review the business’ ongoing profit and loss, and goals are not tied to any financial plan. Planning is limited to month-to-month operations, and end-of-year results are based on hope and luck. Key performance indicators are nonexistent, and goals lack specificity and likely will not be achieved. Financial controls are absent and fiscal abuse is prevalent. The business seeks continuity and stability and is at a loss on how to scale. In this case, money most certainly is not being spent as if it was your own.
According to the U.S. Bureau of Labor, approximately 20% of U.S. small businesses fail within the first year. By the end of their fifth year, roughly 50% have faltered. After 10 years, only around a third of businesses have survived. Surprisingly, business failure rates are relatively consistent. A fundamental cause of failure is the business owner’s lack of financial acumen. A skill easily acquired by learning and doing, yet often neglected, outsourced, and then ignored.
Don’t become one of these statistics! Overcome your hesitation, reluctance and resistance to understanding your numbers. Learn budgeting and financial forecasting. Build annual business and multiyear strategic plans and fully develop and clarify the resources required to execute them and tie them to your budget and forecast. Routinely review your numbers and establish key performance indicators to monitor productivity and goal achievement.
Importantly, inspire your team to be fiscally prudent, create controls that minimize abuse, hold your people accountable, and spend the business’s money like it was your own! This is how you lead, think, plan and act. Now let’s get after it!
Paul A. Raggio is co-owner, with his sister Lisa, of One True North INC Leadership and Business Coaching Solutions.
