April 2, 2014
To succeed, business owners must develop the ability to identify problems on the horizon.
Unfortunately, as is shown by the number of businesses that fail each year, many companies do not detect or correct their problems early enough.
While it is true that some problems are unique to an industry or business, it is also true that most are not.
Usually, if the issue is identified early, many sources are available that can help resolve it. On the other hand, if the problem is allowed to grow, solutions can become more costly, time-consuming and risky.
For most business owners, the reason problems go undetected can be traced to a few common mistakes, which can be easily corrected.
1. Failure to Analyze Financial Information
In many businesses, accounting is viewed as “bean counting” that is simply being completed for some outside party. Although it is true that other parties often need access to the numbers, owners who do not view their statements as a management tool are missing a golden opportunity to detect problems in their business.
Beyond simply using financial statements to determine whether the business is profitable, statements should be examined to determine how specific areas of the business are operating.
To avoid potential problems, financial statements can be reviewed to identify unexpected changes in the business such as increasing marketing costs, declining gross profit or changes in the operating expenses. When changes are identified, further investigation can be done to find the reason for each change. This, in many cases, will help management discover the problem in the early stages.
2. Not Using Projections Properly
Failing to prepare projections is a common mistake that many owners make. Although most business professionals agree that projections are necessary, many businesses get too focused on their daily activities to project their future. Unfortunately, without a clear plan of how the business should be operating financially, it is easy to miss subtle clues that the business is off-course.
An equally costly mistake occurs when projections are prepared and then allowed to collect dust in a drawer. When projections are watched closely, the business has the ability to make small adjustments to put the operation back on track. Often, it is these small adjustments that keep problems from growing further.
3. Not Understanding Cash Flow Needs
One of the most common causes of problems in business is the lack of adequate cash flow. Without cash flow projections, it is nearly impossible to estimate the needs for the cash the business will have in the future. Despite this fact, many owners still make the mistake of not adequately projecting their cash flow needs.
To identify future cash flow problems, business owners should prepare two sets of projections. The first set should project cash flow needs over a period of at least one year. This information allows the business the ability to plan for and obtain proper financing for long-term needs. In addition, it is wise to prepare a short-term projection for the next four to six weeks, which should be updated at least every two weeks.
If a problem is detected because of a temporary need, suppliers, bankers or customers are often willing to help, provided that adequate time is given to address the problem. Many cash flow problems can be corrected if adequate time is available to find a solution.
Avoiding these common mistakes can mean the difference between success and failure for a business. The small investment of time will provide substantial rewards.
This article was originally posted on April 2, 2014 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at firstname.lastname@example.org.