How confident are you about your business?
There is an old children’s game called “Two Truths and a Lie.” The idea was to tell three things about themselves, then their friends needed to figure out which one of those three things was not true.
Try playing this game with three statements about your business – then figure out which one is the fabrication, the lie you’ve been telling yourself:
1. “My Financial Statements are Timely, Accurate, Complete and Useful”
Think about the financial statements you get from your accounting department. Do they help you make important decisions? Many times the financial statements are put in a drawer and never reviewed because the information is too old (not timely), the business owner doesn’t believe the information is correct (not accurate), things are missing (not complete) or the financial statements support the preparation of the income tax return, not running the business (not useful).
2. “We Actively Manage Our Cash”
Cash is King! It is the common denominator for all businesses. NO CASH = NO BUSINESS. Some small businesses manage their cash by looking at the current bank balance. We need to remember that there may be checks that have been written but not deposited, as well as cyclical checks that occur periodically (e.g., payroll). Cash management involves understanding your business’s “operating cycle” (i.e., how cash needs vary over time). To improve your “operating cycle” knowledge, it is imperative you understand all the uses and sources of cash, how to calculate the low cash balance points, and what buffer you need. Many times I will ask executives, “What do you expect your cash balance to be in 6 months?” and they won’t have an answer. If they’re fighting cash flow problems today, the future typically only extends to “next week.”
3 . “All Our Systems and Processes Are Documented”
Processes, whether documented or not, exist in all businesses. In many small businesses, the underlying processes to accomplish the work are rarely documented, and even more rarely are they reviewed for opportunities to make them more efficient or less risky. In a business where no one ever resigns, gets fired, or is likely to walk in front of a bus, the lack of documentation is not a problem. But for a business that lives in the real world, documented processes are critical for quickly training new employees and ensuring that organizational knowledge outlasts any single personal. With this documentation, the sales price of a business could potentially increase as it demonstrates to prospective buyers that the accounting, business and administration processes of the business are firmly established.
How did you do? Were you able to find the lie? Were you able to find any truths? You can learn to play this game better. Please let me know if you’d like some help learning how.