FINANCIALLY $PEAKING: The Seven Deadly Sins of Running a Business
Your experience in the plastics industry may have provided you with insight as to whether or not certain plastic materials or manufacturing and fabricating techniques are likely to be successful. After twenty years of advising business owners and evaluating business performance, I can usually tell if a business is profitable or not without even looking at the financial statements. That judgement is formed by merely observing certain negative factors of the operation and of management. A large number of those same negative characteristics also serve as an indicator that the business is likely to fail within the next three years.
It's a little like that old sailor's adage, "red skies in the morning - sailors take warning". I call the negative business characteristics, The Seven Deadly Sins of Running a Business. If the following apply to your business, now is the time to start the improvement process.
1. Failure to pay attention to details. How fast can you find your last two years of financial statements or tax returns? How long to locate your current list of aged accounts receivable? Can they even be found? How well are your records managed? Sloppy record keeping in itself doesnít cause a business to fail. Instead, itís symptomatic of the business attitude. If the manager canít find the financial statements, chances are the manager canít find inventory items, purchase orders or the backlog of orders to be completed.
2. No awareness of cash on hand. Do you know how much cash you have in the bank? Do you have a daily cash report? Are bank accounts reconciled each month? If not, strike two.
3. Failure to select the right form of business and to review that choice from time to time. When I present a seminar to small business owners, I usually ask for a show of hands as to how many in the audience are corporations, S-corporations, partnerships etc. Most usually know the answer. Then I ask, "how many of you know why youíre the kind of company you are"? As a general rule about half of the audience is able to answer that question. They often indicate that their accountant or attorney made that determination. The important point is that, as the business owner, you should know why you are in that form of business. This is especially true over time as the business form that was beneficial in the past may no longer be appropriate and tax advantages are being lost.
4. Inability to understand financial statements and evaluate changes in performance. Some business owners merely file their statements without reading them, usually because they donít understand anything beyond the bottom line. Some feel too embarrassed to ask questions while others donít have the time to spend reading the statements. If this sounds like you, set up a quarterly meeting schedule with your accountant to discuss the statements. In particular, look for changes from time to time, both in dollars and percentages. At the least, you should be aware of any large variations and work to find the causes.
5. Failure to understand costs. Most costs are either fixed or variable. This merely means whether a cost changes in relation to the activity of your business or the cost remains the same irrespective of changes in activity. By understanding the fixed and variable expenses you are better able to set prices and understand the effect of volume changes on your profitability. That understanding will also allow you to know the level of sales you must attain just to break even.
6. Inability to know key operating performance indicators of a business. In addition to reviewing your financial statements, try to use non-financial data in understanding your business. The number of hours worked, number of units sold and produced, etc. will allow you to integrate operating performance and provide you with another perspective. For example, if sales dollars are decreasing but your labor cost per hour is increasing, there could be a significant reason for the changes. Maybe your product mix is changing and your pricing is not. Maybe production processes are causing higher levels of scrap and spoilage. Knowing that kind of information can reverse negative operating performance.
7. Failure to plan. As they say, "failure to plan is planning to fail". Think about setting up a quarterly budget and comparing your actual data to the budget. If you know sales are increasing which should result in higher profits, comparing actual data to the plan may disclose that profits are not as they should be. This could be due to errors in estimating or the need for cost reduction measures. If you think a budget is too time consuming ... think again. Think about being in a boat without a rudder.
If three or more of these deadly sins apply to you now is the time to take action.
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