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WHAT THE OWNER SHOULD BE DOING TO WEATHER THE ECONOMIC STORM - Mar 31, 2009

Posted by: Paul R. Shackford in Articles

Anyone who starts a business is hoping to ultimately reap the rewards of ownership: the excitement of building a business, compensation commensurate with the risk, and an exit from the business that allows for the owner to enjoy a better life.

But today, with an increasingly difficult economy, there are more and more pressures. Good times allow us to mask average or poor results . . . times like these not only expose them more quickly, they demand action in order to survive. As difficult as it is to start and grow the business, it’s more difficult to manage it as it faces difficulties as we do today.

What Should the Owner Do?

The problem is that the skills and information that are needed when a business starts up, or as its sales increase, are often insufficient when the company reaches The Danger Zone – the period when the cash needs of the company greatly and consistently exceed the sales of the company.

This happens for many reasons:

• Customers reduce the amount they buy, or press for lower pricing and extended payment terms

• The time period it takes to collect receivables lengthens

• Cash is invested in human resources (more people, bonus plans, increased benefits needed to attract good employees) and to build the business (higher levels of inventory are needed, more is spent on machinery, computers, and software)

And the need for more accurate and useful information is critical. It requires a better understanding of the past as well as a vision for the future. Historical financial reports provide a baseline for the future, and should be used to identify the profitability of products, the activities that drive a business and its cash flow, the key performance indicators, and areas for improvements and cost reductions.

But historical information is not enough. The owner needs information that can help identify future paths and plans. New tools are needed: not just the annual budget, but also ongoing forecasts of sales and expenses; projections of cash flow in order to identify future needs; and “flash” reports so that the owner has the information on a timely basis.

The solution is to wrench the system into a position where the owner is not doing the work of others in the company. The owner has to do what only the owner can do:

• Rely on someone else to do the analysis work, someone who is good at it and whom the owner can trust, and work closely with that person

• Spend more time finding new customers

• Refocus on the market and products/services that the company sells

• Have a system created that will provide meaningful information, financial and otherwise

Owning and running a business are always difficult tasks. But we find ourselves now at a particularly stressful time. The owner must have the right organization and resources in order to continue to operate the business, make it lean and efficient, and weather the current economic storm. The owner needs first to understand that there are things that only the owner can do (and things that the owner should not do) and then focus on taking those actions. This will most often require the owner to identify the correct supporting resources—inside or outside the company—that can work closely and effectively with the owner. Only when that is clearly understood can a company be effectively managed.