Consider a Variety of Business Information

Do you consider a variety of business information when making decisions, or are you stuck in the habit of only looking at a few things you think are important?

Some Risks to Consider

There are some inherent risks associated with just looking at the same data weekly, monthly, quarterly, or yearly. An example may be the tendency to think of sales as the only truly important thing to know when evaluating the health of a business. This can especially be the case with small business owners where in the early days of their business it seemed as if there were never enough sales. This is a classic example of how a business can rely so much on particular financial stat that they ignore others that may be just as critical or even more critical at the present time. For example, let’s say sales are growing as you want yet you are still having difficulty paying vendors on time. You may even be thinking you need a new or larger line of credit. What could be causing this cash short-fall? Here are just a couple of things to consider:

  • First, what is the quality of your sales? By that I mean are the margins on products sufficient or do you need to think about dropping some products and perhaps adding others? It makes sense to stay on top of the margins for individual products as well as be willing to change product mix as needed.
  • Are your customers ones that will pay on time, because if they aren’t you can quickly erase what you thought were profitable sales by allowing them to go uncollected too long. Worse, they could become bad debts, meaning you not only did not get the money for the sales but you also incurred expenses for inventory and labor to fulfill the sales. If some customers are paying slowly there is a way to quickly determine where to focus you efforts. You can read more about this in the blog posting 80/20 Rule for Receivables Management.

Another risk of only looking at one or just a few key pieces of information is that you often miss things that can have a major impact. In the case above perhaps the sales are all quality sales in that the margins are excellent and the customers pay on time. However, you still realize that you always seem to be strapped for cash. So, what else could be causing cash shortages? Here are a few things to consider:

  • Excess inventory often keeps cash needlessly tied up. Perhaps if you look at the items you have in inventory you will discover that for some there is enough on hand to meet several months needs and they may be items you can quickly replenish. See 3 Low Cost Sources of Cash – Part 1 for more on this. Incidentally, the 80/20 rule can also be helpful in identifying where the bulk of your investment in inventory is. You may be surprised to find with an 80/20 analysis that just a few items are 70% or more of your inventory value and the turnover for them is very slow.
  • Growing expenses. It is very helpful to regularly examine whether certain expenditures are growing disproportionately. It is easy to get in the habit of approving a purchase that now renders little, if any, real value. Is there a piece of equipment that is now just sitting around unused? Perhaps you would be better off selling it. Are there recurring expenses that are adding little or no value to your operations? For example, perhaps you have a recurring advertisement that you realize is not really producing sufficient sales to justify continuing. You may also find through some analysis and investigation that you have employees who are not making a real contribution or whose duties could easily be performed by others who are not being fully utilized. If so, you may or may not need to reduce head count, depending on why this is happening and whether there are role changes that could rectify the issue.

These things are just a few of what I mean when I recommend considering a variety of business information.

A Little Visual

If you have the habit of exercising on a regular basis and have had this habit for at least several months, then you have likely experienced plateauing. That is, you’ve hit a point where you are no longer making progress. You’re not getting stronger, and in fact may be getting weaker in some ways. You also may be experiencing boredom and perhaps aches and pains beyond what you would normally expect. In running a business something much like this can happen. You see the same information all the time, and you talk to the same employees, customers, vendors, and others all the time, and you have the same routine all the time. Now, I’m not proposing dropping routines. What I am proposing is that you from time to time deliberately breaking some of them. Perhaps you drive to work the same route every day so that it is almost on auto-pilot. Maybe occasionally going a different route may cause you to have thoughts that had never occurred to you before. In your actual business, try talking to different customers, employees, vendors, and others to gain some new insights and perspective. Look at some financial analysis that you normally tend to ignore. You may be surprised to learn something that will prompt positive changes.

So, the bottom line is, do you consider a variety of business information for decision making and also to prompt new ways of considering things?

If you want to know more, contact AimCFO – Contact

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