It is sad when businesses start failing when they get bigger.
When do failed businesses usually start their decline? That was the same question I had when I started consulting. Some statistics say that 80% of businesses do not make it beyond the 5th year. There might be lessons we can learn from that observation. Managing a big business is different from building a small enterprise. Sometimes, “big”-ness does not mean success. It could mean the start of a decline. Why, you ask?
In my decades of consulting, I have seen companies grow. Then they start having problems, which the owner is not ready to handle well.
Sales is important to any business and without it, there is no business. This explains why most businesses are started by marketing men. But as business grows, at some point, an important task that the owner must add to his list of to do’s is studying financial reports. It is just one of them, but is hugely important. Finance people do not run the company. But when operations grow big, the owner needs to listen to this pesky guy in the office who wants to bother him with reports. And why does he sound bothersome? They usually tell the truth.
Financial reports is to a business what an instrument panel is to an airplane. It tells you how long your fuel will last, the altitude, the plane’s trajectory, speed, etc. Without those signals, a business owner of a big company wouldn’t really know how to run his business.
Problems start when the owner who reached a level of success through his strength in selling ignores warning signs from financial data. This is like flying an airplane without looking at the instrument panel. We all know how dangerous that would be!
The company might have achieved its sales target and even surpassed it, but what if they are all collectibles? Collectibles cannot be used to pay salaries or buy raw materials. What if the inventory increases and is not moving fast enough? What if the company is beating competition and exceeding its targets but is having very low margins? Combine that low margin with high overhead which happens when sales grow very fast. You guessed it right. The low margin cannot cover the high overhead.
Wise business owners change their hats as the company reaches a certain level of growth. A savvy business owner knows when that time comes, and puts in place the information system he needs to manage well.
The following are the hindrances to being able to manage finances well in a growing company:
1. Owner sees himself as a salesman
It is understandable when an entrepreneur loves performing in his area of competence. But when he is a business owner and no longer a salesman, his people expect him to lead the entire organization and not just one aspect of it.
2. Gives little importance to financial reporting
Financial reports show the result of management decisions. Some owners who are marketers love meeting his sales people. But when his CFO or accountant knocks on his door to report what is happening to his company’s finances, he orders him to just put the report on paper so that he can read it when he has time. Chances are, he will have no time for it.
3. Poor listener
Some successful businessmen who achieved growth through excellent marketing eventually become poor listeners. They measure their success through the same metrics when the business was small. Since they are successful, they are not willing to listen to anything other than sales reports. While he should not to be expected to be good in all aspect, a good manager must at least be a good listener.
4. Band aid solution for a deep management problem
When financial problems begin to appear, some owners look at the problem as an isolated one that will eventually solve itself. The owner does not see that certain decisions that he made are affecting cash flow. It could be a decision to sell more to the same customer who don’t pay on time. It could be a decision to buy and pay cash for a certain equipment which remain idle in the plant. It could be a decision to increase inventory to take advantage of huge discounts and cash tied in inventory is not moving. All these things may be happening without anybody evaluating and making quality decisions. Finance people in the company could see the interrelationships of certain decisions on cash. Cash is king in any business. When cash do not move the way it should, it could create entanglements in operations which hinder the flow of business. Even worse, sometimes there is nobody in the organization who is monitoring financial results for the consumption of the owner.
5. Fighting fires become the norm
Perhaps the owner is used to acting when the problem starts to manifest itself. I call this fighting fires. Every payday, the owner does something extraordinary, like going to his favorite lender to fill the gap. After the fire is extinguished, the hero is glorified. Everybody can rest and then wait for the next explosion. Fighting fires become the norm. As a young boy, he might have been used to running to his favorite money machine when he runs out of cash. Lack of personal discipline easily creeps into one’s business.
6. Financial reports do not make sense
Financial reports do not make sense when the owner does not know what to look for. Imagine a pilot who does not know how to read the instrument panel. Most of the time the problem is in the one reading the report. If he gives importance to financial reports owners must know what to look for and agree with his finance person what should be shown in the report. The report must be as simple as can be.
7. Self Confidence
Having reached the top should not be a source of confidence. In Jim Collins’s book, “How the Mighty Fall”, he mentioned hubris or pride as the main culprit in a downfall. Here is one of the things he said in that book: “Whether you prevail or fail, endure or die, depends more on what you do to yourself than on what the world does to you.”
Now, how important is knowing and understanding financial data? Financial data are like blood analysis to a competent physician. Whenever something is amiss, the businessman should start looking at every nook and cranny of the business, trying to identify the root cause of the problem. I don’t go for doctors who tell me to take a pill but does not tell me to change certain habits that are causing the problem. I would rather go to the root of the problem and nip it at the bud.
With all the available software apps now, financial data can be available with a tap on the screen of our laptop or cellphone.
We are stewards and good stewards are good managers who are accountable.
“All who are prudent act with knowledge, but fools expose their folly.” -Proverbs 13:16
I pray that wisdom will guide you in your business and the Lord shall be your source of confidence.