The recession is lasting longer and is deeper than anyone expected. When a business fails, the cause can be traced back to several fundamental reasons. Knowing those, may arm you with the ability to track your business now to avoid a catastrophic failure in the future. What should you be looking at early and often?
- Sales forecastsMistake – small businesses are known for not doing an adequate job in forecasting sales. Remember, a sales forecast is NOT: “we’ll increase revenue 18% over last year, just like we’ve done the past 5 years”. A sales forecast shows both what you expect revenue to be and HOW you expect to generate it. That means you identify what customers will be expected to generate specific revenue volumes.
Correction – review forecasts against actual results; at least weekly, monthly is better and if you’re not hitting your sales forecast, review it weekly. When you notice a customer is not hitting their anticipated sales, ask the hard questions of your sales people.
- Financial reportingMistake – small business owners don’t have access to financial analysts who pour through the financial reports (balance sheet and profit & loss statement) comparing results to last quarter, last year, etc. That work still needs to get done.
Correction – ask your accountant (or whomever generates your monthly financial statements) to generate “comparative” financials. These reports are automatically generated by all accounting systems. Look for lines on the statements that show a big change – what caused that expense to go up? or what made that revenue go down? or I had no idea our sales discounts were so high! are all relevant questions to ask.
- PurchasingMistake – not knowing who in your organization is responsible for purchasing what and not monitoring what they’re buying.
Correction – make sure you know about everyone in your organization that is responsible for spending working capital. Yes, that includes who’s buying the coffee. Make sure the things they’re buying are necessary and relevant for the level of business you’re currently experiencing. Monitoring what’s being purchased over time means that you may be able to avoid the “big cuts” if caught off-guard by a sudden decrease in revenue or a big delay in cash collections.
- Product profitabilityMistake – not knowing which products are contributing to the company’s overall profitability. Also, not understanding the current velocity of various products. In this case, the velocity can refer to any sort of growth as it relates to the product. For example, the gross sales for your best selling product may be increasing just like they have for the past 5 years – the velocity is increasing. However, in order to maintain that velocity, your sales people have been giving “one-time discounts” because competition is moving into the product line.
Correction – have your accountant generate profit and loss statements by product line and if possible by product. And don’t accept the answer that “our system doesn’t do that”. Most likely it does but hasn’t been configured properly. Or, shortcuts are taken in terms of entering data that makes the reporting less than accurate. This information is CRITICAL to the success of your business.
- Keep your key people
Mistake – when times are tight, bonuses and incentive compensation may have to be cut back. Like you, people don’t like it when you mess with their income.Correction – keep your best and brightest employees in the loop about what’s happening with the business. They have a vested interest in making sure problems are solved and revenue is generated. If the business won’t support the level of cash compensation they’re used to, look for other ways to reward them. For example, more responsibility, start a phantom stock program (DO NOT give them actual stock) or ask them how they can stay motivated given the current economic situation.