Building a successful business takes vision, passion, a viable product or service, and lots of hard work. Bankrupting a business is much easier. In fact, doing nothing to address systemic problems is often all that’s needed to drive a company off the cliff. Four pitfalls to avoid include the following:
- Ignoring the numbers. If management lacks a basic understanding of the company’s financial statements, severe problems may not be addressed. For example, the balance sheet might be carrying obsolete inventory at inflated historical prices. If the asset section of the balance sheet is heavily weighted toward inventory, management may be given a false sense of the firm’s net worth. An unrealistic view of the firm’s financial health also may stem from faulty accounts receivable valuations. If uncollectible accounts aren’t routinely written off, management may fail to intervene with more stringent credit and collections policies — until it’s too late.
- Disregarding customer complaints. No one likes criticism. But failing to listen to the grumblings of the folks who buy your products and services can lead to adverse publicity, lost sales, and, eventually, bankruptcy. It’s crucial to determine why customer expectations haven’t been met, especially when the same complaints surface from different segments of your customer base. Perhaps your product line needs to be expanded, your existing products tweaked, or your prices lowered to a more competitive level.
- Turning a blind eye to cash. Preparing a quarterly cash forecast shouldn’t be considered optional. Such a forecast will show expectations for each major source of cash, as well as detailed projections of expenses. Updating this forecast weekly, by comparing actual performance with original expectations, can help management adjust quickly to changing conditions. Managers need to routinely evaluate where cash is coming from, where it’s flowing, and how much is needed to keep the company afloat.
- Living beyond the company’s means. A penchant for fancy cars, fine dining, season tickets, and other corporate perks may not capsize a company if adequate revenues exist. But when business income is stagnant or declining, managers may need to take a hard look at costs. In some cases, payroll expenses may need to be reduced to better align with revenues. Superfluous real estate, luxury sedans, or outdated equipment may need to be sold to reduce debt and bolster cash balances.
Contact us if you’d like help assessing the financial health of your business.