The Art of Financial Discipline in Business
Published on 09 May 2019
Money is the lifeblood of business and being able to understand and properly manage money is one of the most important skills a business owner can ever have. In a recent Hub Live, Elize Hattin sat down with David French from The Investment Collective to talk about discipline in business. David has been in business for almost 20 years, and his business currently employs 40 staff and takes care of 600 million dollars, as well as giving advice bookkeeping support to small businesses.
One of David’s key business philosophies is that business is numbers. “You might be the greatest boss or the greatest manager or do the best training or whatever, but at the end of the day if your numbers don’t stack up, you’re nowhere. No one is going to thank you for that,” He said. “If you don’t measure your finances and you don’t have your balance sheet, cash flow and bank accounts looking right, you don’t have a business.” David believes running a business without looking at the numbers is like playing a game without looking at the scoreboard, you just can’t tell who’s winning.
When people hear the word “discipline”, negative connotations come to mind, but David believes discipline is the key to a good outcome. “Discipline is not necessarily a bad word. If you go and do a University course it’s probably in a discipline, like a discipline of economics or a discipline of law or a discipline of medicine. It’s a formal set of knowledge or instruction, and we call that discipline. It’s not a word to be afraid of but most people that run businesses are not disciplined.”
Contracts, Budgets and Discipline
To David, discipline is about taking a real interest in your business and taking the time to get good at the things that are difficult, such as reading contracts. “Every business gets involved in some contracts. It could be a lease for a property, it could be software, it could be all sorts of things. Many of us take these contracts for granted and just sign stuff, but in business you can’t do that. You have to get really interested in whatever someone puts on your desk because you’re being bound to it.”
An example of contract reading gone wrong is a hospitality business David and The Investment Collective had been working with up until they leased a hotel. They hadn’t read the contract or received any legal advice before leasing the building. “They came to me and asked for help, so I asked them for the lease, and I told them that they were going to responsible for all the maintenance, not just the day-to-day maintenance but really big things. This meant that their sewage system wasn’t able to be expanded and they couldn’t put extra units in or upgrade their existing units, and they were excluded from getting Queensland government contracts,” He said. “Because these people hadn’t read the contract or had a lawyer to review it, they were basically fighting the battle with one hand behind their back and it could have been easily avoided.” Reading a contract is a special skill that requires discipline, but has a rewarding payoff. As business contracts are often not standard, you’ll run into issues if you just sign without reading.
Another area of business that requires discipline is budgets. According to David, creating a budget is a lot like building a narrative. “It’s the story of what you’re going to do for the next twelve months or even longer, however the story is told in numbers. You have to decide what you’re going to achieve, guess what issues may arise, and tell that story in numbers. People say, “I’ll try to get five customers by July,” which is great, but what does it mean? What resources will you need to invest in? How many hours of work will you do to achieve that? How will you support yourself between now and then? How will you look after those customers? You need to answer these questions, and one of my favourite tools is a big sheet of A3 paper,” David explained. The paper is good for getting ideas down in a rough, messy way, to consolidate his thoughts and to figure out the numbers before transferring them to a neater piece of paper. “Once you’ve created a budget a few times you’ll understand how it works and it’ll become less intimidating. You’ll end up liking it and looking forward to it,” He said. A good budget is rooted in reality and is about creating a realistic future.
Doing the Hard Thing the Right Way
There is a saying that “if you live life the hard way, life is easy. If you live life the easy way, life is hard.” This statement boils back to discipline, as if you push yourself to work hard every day, your life will be easy, but doing only what you feel like doing will make things harder. Discipline is making sure you do, what has to be done.
As an investment portfolio manager, David comes across improperly managed investment portfolios regularly. “Often they’ll come to us with a shoebox full of stuff. The very first thing we do is load it all up into an Excel spreadsheet. And sometimes when companies break up, the shares will need to be split. So, a $10 share might become two $5 shares. It can be really messy, and so many people just don’t bother with it. They’ll come in and say to me, “Why does something that happened in 1970 matter to me today?” Well, it matters a lot. Sometime down the road someone will want to sell those shares. When that happens, if you just say, “That’s a great idea, sell it,” then what about the capital gain that stretches all the way back to 1985? A responsible advisor is bound by law to do as the client asks, but how can an advisor give the client an informed answer unless you’ve done that work? It’s much better to do the work when the client first comes in, making sure all your ducks are lined up so that you can advise your client correctly and get them an answer quickly.”
Not every business has had the most perfect start in terms of keeping on top of finance, but it’s never too late to start. David said, “If I have been a bad person all my life and I decided I wanted my life to be better, wouldn’t I just start now? I wouldn’t say I was going to start in a week. If you’ve been winging it with your business and having a crisis every day or so, the message you need to hear is to get serious and get disciplined about how you keep your data and start today.”
Another issue David often sees is people who don’t try to understand the things that are happening in their business and instead they rely on outsourcing those tasks. “We get involved with a business that’s in trouble and they say, “Go talk to my accountant because my accountant didn’t tell me the details,” but it’s not the accountant’s responsibility in the first place. Accountants and bookkeepers are responsible for letting you know what’s going on, but it’s not their responsibility to give you business advice. You need to be able to understand your business well enough to make the reports mean something to you.”
Scaling your Business
Overall, the function of a business is to make money. Without money coming into the business, the business cannot stay open, and the more money that comes in the more the business can grow. This is called scaling, and according to David, there are two ways to scale: economy at scale, or capacity utilisation.
Economy at scale is having a fixed cost which you can sell more against, meaning it costs you the same amount to produce more and more product in order to lower the cost per unit. David gives the example of paying for third-party software per user, versus creating your own software. “Buying a software licence for every user isn’t scalable because every time you bring on a new user you have to pay that licence fee again. What you want is to move away from that model so you’re either paying a flat fee for the whole business to use the software or to at least have a fee that doesn’t increase one-for-one with the number of staff. But if you built this platform yourself and you own it, it doesn’t matter how many licences you need. We set up a project and hired a programmer and built our portfolio management software from the first keystroke. This is where the majority of our profit is generated, because every time we get a new client, we’re not paying a third party to service that.”
The other way to scale is via capacity utilisation, where you have something that’s fixed cost, such as manufacturing equipment, but isn’t being used to its full potential. To add more customers wouldn’t increase your spending, as you’ve already paid for the equipment required.
According to David, these are fine examples of things you do when you’re good at business. “If you take it seriously and apply discipline to how you think about your resources, you can maximise your profit. You might not be able to do these things if it’s just you, but five years down the track you may be able to do these things. Start planning for that now, thinking about how you can reach that point down the track so you can get the economy to scale or the capacity utilisation advantages, capture them and set that as an objective.”
David’s final piece of advice is to always be prepared for things before they happen. Things like keeping a budget and a business plan, paying attention to your accounts and bookkeeping and keeping an eye out for advantages within the business should allow you to adapt well ahead of time.
Within that falls banking or financing arrangements, something David has been dealing with in his own business. “The bank’s not going to give you money when you need it. If they do give you money, it’s going to take months and months. We just revamped our banking at work because we’re expanding, and we want to do some things. The bank approved it in November and it’s still not finalised in May. So that’s six months wait time with a really good banking relationship and a solid track record. For us it’s a minor annoyance, but if you’re in trouble and need help from the bank and you haven’t got six months, you won’t get the help you need. If you’re disciplined and you put the time aside to be prepared, you hopefully won’t be in that situation in the first place.”
Growing with the SmartHub
Being part of the SmartHub gives local business owners opportunities to meet with and learn from mentors, to help them learn the discipline required to succeed in business. If you’d like to learn more about becoming part of the SmartHub, message SmartHub Rockhampton on Facebook or just head over to Customs House at 208 Quay St, Rockhampton for a tour.