Updated 6th May, 2025
Real Story: When Profit Isn’t Enough
I just had a phone call with one of our CFOS. He had recently met with a business owner who had some serious financial issues in his business. His business is currently profitable (apart from quite large interest payable on debts). The debts are to a previous business partner, his bank and the Tax Department.
This is not an unusual situation in our experience with business owners. But there is a serious case of ‘COI’ (Cost of Inaction)!
The CFO had a good, long chat with the business owner and managed to unpack most of his business challenges—what was stopping him from moving forward with business growth. He is in hospitality, in a fairly good location and seems to be faring quite well, despite the current situation with a decline in discretionary spending. He has good experience in his industry and aspirations to grow beyond his current single outlet business.
When Business Owners Ignore Financial Management
This is a very common phenomenon, where a business owner is good at what they do—their ‘core business’—however they fall down on the financial management side of things. They believe that if they just keep selling plenty of stuff, everything will work out in the end.
The danger with this thinking is that if it isn’t working now, business growth isn’t going to fix it. In fact, it’s probably going to make it a lot worse.
Debt is a Hidden Danger
Excessive debt is like a massive weight on your shoulders in business. If it’s not dealt with ASAP it will absorb all your cash reserves and emotional energy.
We offered this business owner our services to help him fix it (at an extremely fair price), but he’s currently dithering. The CFO asked me “How should I deal with this guy?” My reaction was COI – the ‘Cost of Inaction’.
What is the Cost of Inaction (COI)?
We’ve all heard of ROI—‘Return on Investment’. However, not too many people tend to think of COI. Essentially it means: what is it costing every month we put off dealing with a problem like this? Harvard Business Review highlights that inaction often comes at a higher long-term cost than proactive decision-making.
Let’s assume this business owner is paying $5,000 every month in repayments (most of it interest). That may be a lot of money to find from current trading. He’s effectively getting deeper and deeper into debt. By burying his head in the sand and avoiding fixing it, his problem is just getting bigger.
Eventually, he may have to repay this debt from his own pocket. This will probably not go down well with his family. The situation could potentially mortgage his future aspirations and even exclude him from running a business again.
For the want of paying for some help and advice to dig himself out of the situation, his hands seem to be tied. The short-term pain will be nothing compared to the alternative of letting it run its course until he has no business left and a big personal debt to pay off!
How to Fix It: CFO On-Call’s Suggested Actions
Situations like this can seem unfixable to the untrained eye, but can often be very easily managed to provide a successful outcome. It may take a while and some tough decisions… At the end of the day though, it’s worth the short term pain to come out the other end intact.
One of the most effective solutions is engaging a Virtual CFO, a financial expert who can provide ongoing strategic guidance without the overhead of a full-time hire.
What we would suggest to fix this situation:
- Review current loans:
- Type of finance – are they fit for purpose?
- Term of loans
- Interest rates
- Consolidating loans
- Work with client to present a good case to lender i.e. solid financials
- Analyse what led to the high level of debt to the Tax Department
- Regular cash flow forecasting and budgeting to arrest the growth in debt
- Analyse business profitability with a view to improvement i.e. sales, costs and overheads
- Review working capital requirements to minimise the amount needed
Common Financial Mistakes That Drain Profit
What often tends to be missing is a clear head and some logical thinking. Financial management can seem like a bit of a mystery to some people; however, to the trained logical thinker, it’s a ‘no-brainer’ what needs to be done.
It’s as simple as analysing the current situation, considering all the options available, and plotting a pathway ahead. Good financial management doesn’t happen by accident. I can’t stress enough the massive cost of getting it wrong. Here are just some of the things that can go wrong:
- Constantly not knowing the ‘true cost’ of your product/service and not pricing it right to ensure profitability
- Not regularly reviewing costs and overheads to ensure they don’t get out of hand and suck up all your profit
- Not having a budget, monitoring it and acting on variations
- Having the wrong credit terms with customers who then proceed to treat you like a free bank loan
- Having the wrong credit terms with suppliers, who are also treating you like a free bank loan
- Holding too much stock—think of it as dollars piled up on the stockroom floor
- Jobs/projects running for too long before being invoiced, not being run efficiently, and ending up being loss-making
- Having the wrong type of finance in place that’s too onerous and costly for the business
In Summary: Don’t Let COI Destroy Your Business
I could go on and on with this list! Suffice to say, just the issues above—if handled correctly—can make a massive difference to the profit and cash flow of a business… and may eliminate the need for borrowings at all.
To summarise: Don’t underestimate the capacity of poor financial management to bring a business undone. Get help before it’s too late and avoid the ‘Cost of Inaction’. Rant over!
