The Fiscal Physical

Need credit access and capital? There are seven financial issues that are critical to improving the communication between the banker and business owner. Here are some ways to manage these factors, gain better control and improve your business performance.

In the few minutes it takes you to read this article, forty businesses across the nation will fail — and that statistic was before the economic environment of the last 48 months.

Tragic? Yes. Remarkable? Not at all. The road to business success is littered with the skeletons of companies whose owners – mostly brilliant, skilled individuals – failed to “take care of business” in the financial management of their enterprise. Just a minute . . . am I saying that good ideas, technical skills, product knowledge, and sales ability don’t guarantee success? You bet I am.

Anyone in a position to provide capital will tell you that the ability to develop and control an organization financially is absolutely vital. There are seven financial issues that all business shares, regardless of organizational size, product complexity or supply chain depth. Successfully managing these seven factors by using the financial tools and techniques that support them is critical to improving the communication between the banker and business owner, as well as driving improved business performance. They are:
1) Plan properly before start up
2) Monitor financial position
3) Understand the relationship between price, volume, and costs
4) Manage cash flow
5) Manage growth
6) Borrow properly
7) Plan for transition

If owners do not evaluate one or more of the factors listed in this “performance checklist” regularly – as in twice a year – it does not mean their business will not succeed. Rather, it identifies an opportunity for them to measure their results and improve their performance.

Think about it this way: To insure your own personal well-being, you have an annual physical every year from your doctor, don’t you? Well, your business is no different. It needs an annual check-up. Your business should go through a Fiscal Physical involving a structured financial review that asks the questions: Where have we been? Where are we now? Where are we going?

It is good, metaphorically speaking, to take your business and shake it, sort of get the cobwebs out. “About as exciting as watching grass grow,” you say? Yes, I agree, but it’s good for you. “I don’t have time,” you say. Let me remind you: You have all the time there is. Why is there never enough time to do a job right, when there is always time to do it over?

There is another reason, perhaps more compelling, to give your business a detailed performance review now. March through May is “loan renewal time” in the banking industry. For any owners that are planning to initiate, maintain or expand credit access in 2012, you can expect far more rigorous standards than what we experienced in the last four years. Due to the impact of a recessionary economy, the banking industry is coming under far more stringent review guidelines, and owners should expect that to be reflected in the way their own credit needs are evaluated. The Fiscal Physical assessment will not only uncover performance improvement opportunities, but it will also provide valuable insights into the loan renewal/credit access process.

What are the common problems and what should be evaluated carefully during the Fiscal Physical? Let’s briefly look at specific issues, some tools to support them, and then evolve some action steps . . . after all, what good is analysis if it doesn’t lead to action?

PLAN PROPERLY
Mother Nature gives expectant mothers a nine-month gestation period to prepare for motherhood, but she isn’t so kind to business owners. With regard to business organization and the IRS, the errors are usually of omission, not commission. Poor initial and ongoing planning is common error. Far too many owners get into business without a sense of purpose and direction – it’s the “jump and hope” philosophy. Most find that being in business is like being in school, except for one thing: In business, you take the test first! Although most business owners have a plan, far too often it resides in their head and not on paper.

MONITOR FINANCIAL POSITION
Another common problem is the owner’s failure to consistently and personally monitor financial position. You leave the scorekeeping to your accountant because you don’t use the information anyway. But who is at risk here? Does your accountant co-sign your bank notes? I know . . . financial statements reflect the past, and any enterprising owner only thinks of the future . . . it is tomorrow that matters. Unfortunately, tomorrow is the sum of a series of yesterdays. And if you don’t know where you’ve been, you can hardly know where you’re going.

Business owners must develop a singularly effective financial report card – and link it to a unique “Roadmap” – to pinpoint and quantify opportunities to improve both profits and cash flow.

KNOW YOUR COSTS/PRICE PROPERLY
Failure to price properly and know your costs is a real problem, and Break-Even Analysis is the most strategic and powerful profit planning tool available. For the last 48 months, the most common message in the myriad of information on business performance is cut your costs! To improve profitability, however, I strongly suggest that before you cut your costs, you should know your costs. Then you’ll be able to cut with a scalpel, not a hatchet.