by Larry Chester
CFO Simplified is an IMA B2B Partner
What Color Are Your Glasses?
By Larry Chester Budgeting , Financial Statements , Management , Reporting And Metrics1 CommentLike
Everyone wears glasses. I mean the figurative kind. The kind that color the world that we see around us. We all know people that have a pleasant, upbeat attitude, and we all know people that are grumpy all the time. Then there’s the people that feel that the world is always against them, and those that feel that their life is a complete gift, with a red carpet that is rolled out for them at every opportunity.
But what I’m talking about now is the way that you look at the future of your company. Do you look at that future through Rose Colored Glasses? Do you look at your company’s performance and feel:
- We’re just having a bad month (quarter, year) and it’s going to get better soon.
- We’ve faced this situation before, and we’ve always been able to dig out of it.
- We’ve been a good customer for the bank, they’ll give us the extra money that we need.
- We’ve always treated our employees well, they’ll forgive our being late with payroll.
- Our customers are really loyal, and those new orders will be coming in any day now.
- The cost increases we got from our major suppliers are just temporary.
You may be right. These issues could resolve themselves. But the problem is that each one of these situations could also just get worse. And if they do, or if they just continue the way they are, you and the company could be in for a tougher road ahead.
In most of these instances, we’re talking about either a Cash Shortage, a Sales Slump, or a Drop of Gross Margin. But to be honest, the first thing that you need to do is stop thinking that these issues will resolve themselves. Stop dreaming that the future is going to improve. It just might, but do you really want to leave your future in the mystical hands of Fate?
How do you know if this is just a temporary change, or if it’s part of a new reality? To understand which it is, you need to:
- Take a clear look at your history
- Look at your plan for the near future
- Get an unbiased opinion
Your financial statements tell you a lot about the way your company has performed. But you need to look at it diagnostically to really understand what all those reports are telling you.
- Trend Analysis will give you a different view. The question you need to ask is whether your current performance is an aberration, or if it’s just a new reality that you haven’t noticed. One way of making that determination is to do a Trend Analysis. It doesn’t matter if you’re looking at Sales, Gross Margin, or Specific Expenses. If you track those numbers over a period of years instead of over the past few months you will discover if there is a steady change in the way you’re been doing business. If not, you’ll quickly identify that something sudden has happened to change your world.
- Subsidiary Reports will give you more information. Is the change in your company happening to every part of it, or only a few specific parts? If you can isolate the problem, then you’re able to make a few changes that improve the weak part of your company and improve all of your numbers as a result. But to do that, you need to look at sales by product family or individual item. Look specifically at sales geography, returns, individual margins, or overhead expenses. That detail isn’t in your income, you have to dig deeper into reports that provide the detail behind the summary numbers.
- Do they need to change? It doesn’t matter if you’re looking at your budget or individual departmental goals. Evaluate if the plans you created last November have stood the test of time. In a changing economic environment, a few months can make a big difference in the effectiveness or potential results that you’re expecting.
- Are you expecting significant results from your planned changes? If you see that your cash shortage is $50,000, and you’re looking at reducing your $1,000 office supply budget by 10% to help out, you’re not thinking big enough. Agreed that small changes add up to big results, but it’s going to take a LOT of $100 changes to make up for that $50,000 shortfall.
- Are your plans realistic? You think that a reduction in price will greatly increase sales. Does your experience give you confidence that you will achieve the expected results? Unless you have a historical record that this will happen, you might be expecting an unrealistic result. And if you can’t feel confident that it will succeed, how will your bank or other investors feel about it?
- When you sing in the shower, it might sound good to you, but will everyone else agree? The same is true of your plans and ideas. It’s important that you get real and honest reactions to what you want to do. Encourage people to be devil’s advocates, and punch holes in your ideas and plans. It does you no good if everyone just nods their heads in agreement. Everyone loses if you all go down with the ship together.
- An outside voice, whether it be your accountant, banker or a consultant, will be able to help you by looking at your plans from a different point of view. They have experience that’s different from yours, and they aren’t committed to a prior plan. You have a vested interest in your plan – it’s YOUR PLAN. It might be just the additional opinion you need.
When companies and owners face difficult times, it’s important that they get help from outside their inner circle. By looking at the issues you’re facing with a new approach or with additional help, you might find a simple solution to your problems, or be better able to face a difficult reality. But even if the road is harder than you had hoped, your view will be realistic, and not tinted by the glasses that you’re wearing.
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