Every business has a profit pencil, but no business as a cash pencil. What does that mean? What it means is, profit is an accounting opinion and cash is fact. You can fool yourself and others about your profit, but you can’t fool anyone about your cash. You can under or over report your profit by moving expenses and income to a different reporting period. But, you always need to know if you have enough cash to pay you help, pay yourself, purchase your feed in two weeks and make that truck payment on the 15th of the month. In a horse business, more so than most other businesses, budgeting and cash management are both extremely important. Cash flow is king in a horse business. However, planning your cash flow is easier said than done, especially if you’re not a numbers person. If you are going to succeed in business, mastering basic cash flow projections is a must. You can be profitable and still have poor cash flow, simply because the cycle of cash in and out of your business is rarely synchronized. A good management system makes sure you know how much cash is fact. The equineGenie management system, with its built-in artificial intelligence, is on top of your cash requirements every day.
Getting started measuring and managing cash is a big stumbling block for most people. The first thing you need to know is that your projections don’t have to be, and probably will never be, 100 percent accurate. It’s one of the reasons many business owners hesitate working through this process. But, it is possible to simplify the process. A good management system like equineGenie will do it for you.
Most horse people are great with horses and do a good job managing their horse tasks and activities. But, caring for your horses is not a cash positive activity and you had better have the cash to be able to afford to care for them. It is not your horses’ fault if you are a poor business manager. Most horse people have had little to no business training and depend on their accountant or accounting software for management. By-the-way, an accounting course does not qualify as business training. An accounting course only adds to your business tool box. The only thing accounting does is teach you to record your income and expenses in the right accounts. One major financial tool missing when you depend on accounting is measurement and management of your cash requirements. Most people think recording their financial transactions is all they need to do. Don’t get me wrong, you need accounting for filing your taxes and occasionally to satisfy your banker. If you stop and think about what is really required to manage your business, you quickly realize it is much more than accounting software can provide. You need a management system that will analyze your financials for you and help you project your future cash requirements so you can make good business decisions.
Unfortunately, the majority of horse businesses are managed by only measuring the ‘bottom line’. Your ‘bottom line’ is important and had better be positive more often than not, or you won’t be in business long. And, your ‘bottom line’ ties directly into your cash on hand. Your ‘bottom line’ can be either a cash generator or a cash consumer. Unfortunately, management by the ‘bottom line’ is generally linked to ‘checkbook management’, which results from using accounting software as your management system. ‘Checkbook management’ doesn’t afford you the opportunity to truly manage your business because it doesn’t connect what is really happening in your business’s financials, hence the ‘checkbook management’ trap. Running your business out of your checkbook is a path to going out of business – unless of course, you have an infinite source of money. You might have checks, but just having checks doesn’t tell you if you have enough cash to stay in business. An MBA by baptism of fire can be more expensive than going to the Harvard Business School. It will certainly cost a great deal more than a good management system like equineGenie. An example of poor cash management is purchasing the ‘best’ truck and horse trailer when something that requires less cash will do the same job. If you purchase the ‘best’ truck and trailer without good cash management you probably will not be aware that the extra cash required is really needed for some other financial obligations that are more important. And, by-the-way, your ego always has a lousy Return on Investment.
There are several ways to measure and manage cash in your business. A good management system will provide a Statement of Cash Flows and a Statement of Projected Use of Cash. Your Statement of Cash Flows reports how your income and expenses change over a defined reporting period. That period can be as short as each day. The equineGenie management system reports you cash changes daily. Cash flowing into your business usually comes from one of three activities - financing, operations or investing. Cash flowing out of your business usually results from expenses or investments. Cash flow is a good indication of a business’s financial strength and solvency. Profitable businesses can go bankrupt due to the lack of cash. Think about that, and if you don’t believe it give me a call!
There is another cash measurement that is beyond the scope of this article. It is Discounted Cash Flow that is used to measure the potential of an investment such as purchasing a new horse for use in your business to grow your revenue. If anyone is interested, call me.
Have you ever thought about cash in a physical sense? Cash is not just the money you have in your checkbook, or the available funds on your credit cards. Cash takes on all shapes and sizes. Inventory is cash at rest – and if it is there too long it is lost cash (spoilage, stolen, damaged). Your hay, grain, bedding, saddles, bridles and bits, etc., all represent cash – and hopefully not cash at rest. Remember; keep your assets and inventory at a minimum and working for you all the times. A good management system will monitor your supplies on hand, their rate of consumption, their stocking level and the time it takes to replenish them. A good management system will tell you when to purchase more. A good management system like equineGenie will make sure you always has enough on hand, but never too much – thus preserving your cash.
In a previous article I had discussed the ‘waterfall’ consequence of a financial transaction and the affect it has on your business and how an understanding affords you the opportunity to make better business decisions. If we analyze the hay purchase transaction again you can see where cash is involved in the ‘waterfall’ and how equineGenie tracks your cash flow.
Hay Purchase – Financial Transaction ‘Waterfall’ Illustration with Cash Measurement
The take away is every business starts with some kind of financial transaction and if you understand the ‘waterfall’ consequence of a financial transaction and its use of cash you will be far ahead of the majority of your peers.
Uunderlying the success of any horse business and the management system you chose is your commitment to keep your system current and use the information it provides to assist you in making good business decisions. Believe me; you need a horse business management system! But, purchasing one if you do not have the ‘business discipline’ to keep it current and use it is a bad business decision, and probably not the management system’s fault! If you dedicate the same discipline to your business as you do to your horses you will be in good shape financially or at least know what needs to be done to ‘fix’ your business.
To be successful in a horse business does not require a finance education, but it does require business discipline and an understanding of what your financials are telling you. This understanding will enable you to make better business decisions. A good Horse Business Management System will do the calculations for you and analyze and report the results with comments or suggestions. A good Horse Business Management System will save you valuable time you can then use to improve your business. I encourage you to investigate how equineGenie not only helps you manage and care for your horses and manage your business operations and support your customers, but helps you be financially successful. equineGenie will add value to your business.
Bob Valentine, Ph.D. President GenieCo, Inc. Box 271924 Ft. Collins, CO 80527 970.682.2645 or 970.231.1455 firstname.lastname@example.org www.equinegenie.com Dr. Valentine taught Equine Business Management to graduating seniors in the Equine Science Department at Colorado State University. He has been involved in the horse business for too long. If you have any questions, you can reach Bob at email@example.com, or call him at 970.682.2645 or 970.231.1455 (mobile).