by Jon Paul.
Suppose you are leading a golf tournament and need to decide to play it safe or be aggressive on your tee shot on the 18th hole, but you only know your score after 9 holes. Or perhaps you are managing a baseball team and need to consider pulling your starting pitcher in the 7th inning, but you only have the score after 3 innings.
We know that wouldn’t happen in sports – decisions are made with up to date data. However, that happens often in business. I call them financial blind spots.
So why bother? Why care? Because smart business owners who make decisions based on bad information get sub par results. What follows are several common business “blind spots” that can put your business at risk.
- Overall Results.
My consulting practice is focused on companies under $50 million in revenues. In about 70% of the cases, I find that the financial statements are misstated and have to be redone. It’s just that the numbers are off, nothing fraudulent. The profit and loss could be overstated. There may be unusual swings between monthly results. Key liabilities could be missing. Some assets may be overvalued. The numbers may be just hard to make sense of or come in very late after the month end.
So, what causes some of this? One thing can be using cash accounting when really accrual accounting would be much more appropriate. Another thing could just be poor month end cutoffs and accruals. Another factor can be focusing on the profit and loss statement and not paying enough attention to the balance sheet. It could also be that the staff is not qualified and the outside accountant isn’t going deep enough to understand the situation.
- Margins.
What’s involved is not getting down to a deep enough level, going beyond the fundamental financials in order to get a deeper understanding of how the company really operates and is really making their money. It could be by customer, product, division, territory, sales rep or other grouping.
So, what are some lessons about margins? First, track margin not just revenues in your management report. Secondly, get a sense on what channel the money is made in, in your business and, perhaps, see if you’re in the right spot. Third, have a very good cost accounting system. You need that in order to have confidence in your numbers. Fourth, balance your margins with risk and make sure they fit. Last, remember the turnover side of the equation, as turnover can help margins too.
- Internal Focus.
This is where the company has a cost-plus mentality and is very tied to past practices without having a good look for outside validation. As a result, it could be missing on some significant opportunities for higher margins.
- Capital Needs.
How much capital is really required? How long will the money last? What kind of structure should it be? The firm also could be missing out on understanding how to value any equity coming in and how long does it take to raise the capital. In particular, it is also making sure that the capital will make a long-term change in the company, not just get the company deeper in the swamp.
- Working Capital.
This blind spot means the company has too high accounts receivable or inventory levels. A lack of people to follow up could be missing, as well as key drivers to determine the right level of working capital. It may not be getting enough support from the top. Sales and purchasing policies may be made without considering the impact on working capital. Finally, nobody may be really looking at the working capital cycle.
- Income Taxes.
Nobody likes to pay more in taxes, but it still happens. Company might miss out on deductions or they take action too late to do anything, after the year is finished. They may fail to bring in good tax help to review their taxes or be missing documentation, which makes the job difficult for the tax advisor. Bad reporting from accounting could also lead to incorrect tax decisions.
- Financial Staff.
The financial staff is not adequate to care for the financial needs of the company. They may have the wrong person in charge, such as outgrowing someone who has been there a long time. It might be somebody brought in from a different industry or size of company who isn’t catching on. Sometimes they’re missing a head of finance. Also, it could be the staff hasn’t been fully developed, missing someone to mentor and train them. Finally, they could be relying on an outside accountant who lacks the time or operating experience to really get deep into the operation.
- Financial Systems.
The company system just may not fit their particular industry. The computer system might fit the industry, but too small for their size of company. Or, the opposite, the company has been enamored with IT and way overpaid for a cumbersome enterprise system. Another fault is that the selection was very finance driven, rather than sales and operations user driven, so it is not getting accepted.
- Cash Flow.
While perhaps most important, this is mentioned last, because the other blind spots all feed into this one. One cause is not knowing the current cash position. Another is not having a cash flow statement of the financials and really understanding the nature of the cash flow in the business. There could be a lack of a short-term cash forecast, so as a result the company gets blind sided by cash squeezes every so often.
It’s unlikely you’ll be hit by all nine financial blind spots at one time, but there could be a couple lurking. Give your firm a checkup on these with the help of an outsider.
Keep your business vision sharp, so you can have the information and resources you need to make smart decisions and execute them.
About the Author:
Since 1992, Jon Paul has brought new insights on company results to presidents and helped them drive superior results with his strategic and tactical guidance. As head of Value Added Finance Resources, Jon turns the finance area at firms into a value added resource that propels the rest of the company.
