By Diane M. Calabrese / Published February 2018
It’s fine to feel good about one’s business and its prospects, but that positive glow should never substitute for critical assessment. An owner must monitor every facet of a business. Nothing is insignificant. Small, seemingly inconsequential things can build to big negatives.
“Assessing your expenses is very critical,” says Doug Rucker, owner of Clean and Green Solutions in Porter, TX, “especially those daily expenses like fuel usage, chemical usage, labor, etc.”
Overlook nothing, advises Rucker. “Even the small items like fittings, guns, and so on need to be assessed. When expenses go up on these items, we must verify that the business income justified the increase of expense. If it didn’t, then we need to find the reason for the higher usage.”
Everyone hopes that usage of supplies increases because more work is being done and revenue is growing. Unfortunately, there are other possibilities; and should they be the root cause, then the faster they are confronted, the better. Rucker points to employee carelessness, laxity in maintaining equipment, and theft as issues that an owner will quickly identify—and be able to deal with—by closely monitoring expenses.
The interval at which critical assessment of a business is done remains at the discretion of the owner. “We assess every month by reviewing the P&Ls [profit and loss statements], mainly looking for anything that would stand out for the previous month; but we do a hard, critical, line-by-line assessment once a quarter,” says Rucker.
Most businesses do some form of scheduled business plan revision and have a formal business plan. Approaches to both vary.
“The most important ‘plan’ that we look at is our marketing plan,” says Rucker. “We are constantly monitoring it to make sure what we are doing is working, and making sure we have the ability to change as needed the strategies that aren’t working.” We then compare that to our business plan and adjust the business plan as needed, too.”
Rucker stresses how important it is to be able to clearly acknowledge what is not working. Some business owners become so fond of a particular approach or strategy that even when a quantitative evaluation indicates a marketing or other plan should be abandoned, they cannot make the change.
An owner who hesitates to change may not be lost, but the business may not succeed if warning signs are ignored. Without profit, a business cannot upgrade facilities and equipment or grow in size or in new directions.
Any reluctance to make a change dictated by changes in (or lack of) cash flow should be countered with an honest look at why a business exists. Serving customers and providing useful, desired products are components of the reason, but without making a profit, there is no way to do those noble things.
Moreover, every business has businesses in competition with it. To succeed in the context of competition, a certain toughness and ability to take a dispassionate and critical look at the business are mandatory.
The wider the scope of the assessment, the better. Accountants provide their clients, and professional organizations offer their members, tools that can be used to assess how a business is performing in the context of its competitors. For example, the Cleaning Equipment Trade Association (www.ceta.org) offers an annual opportunity for its member distributors and
manufacturers to participate in benchmarking. A third party compiles data supplied by participants and provides each participant business with a profile indicating where it stands among competitors on a range of financials; identities of participating businesses are not revealed.
An owner may not want to be an owner forever. Perhaps a business is flourishing, and selling would yield the capital for a new, entirely different, and long-dreamed-of venture. So far, it’s all doable.
Yet without a documented profit, it may be difficult or impossible to sell a business. Any qualified and serious buyer will want the opportunity to evaluate the financial condition of a business before buying it, and the prospective buyer will want to know the business has a record of being profitable.
Critically assessing a business, then, is not just for the benefit of the owner who wants to sustain and grow a company. It’s a must for the owner who may one day want to sell.
In fact, looking at whether a business is saleable is an oblique way to critically assess it. The guide Selling a Small Business and Succession Planning for a Small Business (https://www.sba.gov/sites/default/files/files/PARTICIPANT_GUIDE_SELLING_SUCCESSION_PLANNING.pdf) from the U.S. Small Business Administration (SBA) can be tapped as an assessment tool. Try answering the questions it poses to determine if a business is saleable.
Is the business profitable? Does the business have a value beyond its assets? Is it in an attractive industry? What about the location—if it’s important, is it a good one? (And don’t discount the negatives of conflicts over parking and dumpsters with neighboring firms.) Are relationships with suppliers good? Is the customer base strong and likely to move to the new owner? Does the business depend heavily on one person? (If the reliance on a single individual—for sales, design, or other—is too great, a potential buyer may have trepidation.)
A viable mix of collectable accounts, low debt, net worth, and a solid margin on profit from revenue will interest prospective buyers. The mix is the same one that should interest an existing owner who wants to sustain a company.
The SBA guide on selling also enumerates seven things to do in preparation for a sale. The seven things are actually what an owner should be doing every day. First, outstanding issues should be resolved as quickly as possible. The issues include unpaid accounts receivable, debt, lawsuits, and environmental hazards.
Second, put more effort into collecting accounts receivable. Find a way to cut time to collect.
Third, prepare financial statements (historical and projected); and fourth, have a business plan that is grounded in reality. Fifth, establish good relationships with customers and suppliers. Sixth, keep the premises in good condition. Seventh, sell old inventory.
Selling old inventory may be a stretch in adapting recommendations for preparing for a sale to actions for the day to day, but selling old inventory can be a good activity for manufacturers and distributors who are using space to store what’s moving sluggishly or not at all, especially if the space taken could be used for inventory that does move quickly. Not being able to store sufficient items for immediate shipping can prove a liability.
Nostalgia and critical assessment are not compatible. So just acknowledge that every transaction, whether in the real or virtual or hybrid (real/virtual) world, involves risk. Critically assessing a business involves reducing that risk.
Another SBA guide, Risk Management for Small Business (https://www.sba.gov/sites/default/files/files/PARTICIPANT_GUIDE_RISK_MANAGEMENT.pdf) offers some great tips. We strongly recommend this particular curriculum guide to all readers who own businesses. Reading its 23 pages equals an excellent self-testing tool for critically assessing whether all is being done that can be done to keep a business in equilibrium.
We can only offer a few highlights from the risk management guide in this space. Start with equipment and information technology. Without administrative controls, introducing new equipment (from vehicles to computers) and technology (credit card readers) may take place without a thorough evaluation of how the new will mesh with the old. Someone must anticipate the things that may go wrong (and work to prevent them) before changes are made.
Similarly, have a plan for coping with natural and human-made disasters. Be able to work around storm damage and utility damage (broken water mains, gas lines) to the fullest extent possible. In the worst-case scenario, have a mechanism for informing customers and vendors if caught in a downtime mode.
Prepare for conflicts employees have that affect their ability to do their job. Children get sick. Personal emergencies happen. A plan for dealing with intervals when someone on the team cannot give 100 percent can be useful.
Try to minimize the risk of employees leaving and taking valuable information or customers with them. Non-disclosure and non-compete agreements may help, but probably will not. Have a close enough relationship with employees (directly or via their managers) to know what’s going on. Is the employee working for the company, or is the employee working for him- or herself?
Never become complacent. If the financials are good—and the owner feels good about the company—that’s all fine. It does not mean the owner should just sit back and relax, nor should anyone else on the team.
A business is like a garden. There is always something (brush clearing, structural repair) that can (and should) be done.
A business owner feeling sanguine about a business might look closely at each customer. Perhaps it’s time to weed out the customers who demand much but purchase very little, or request so many changes to orders that they boost costs and have inventory moving in costly directions.
The point is: Do something. And critically assess.