As a controller for several companies, I’ve always recognized the importance of having timely and accurate financial information about your business. Recently, I’d been helping a client organize their accounting so that they could apply for financing of a building. We’d cleaned up their books, and the client was surprised by some of their prior-year profitability numbers. I told them, speaking from longtime experience, that most people’s first reaction when going from poor financial reporting to timely and accurate reporting is surprise — usually unpleasant surprise.
However, this rude awakening is the best thing that can happen because it’s the first step to better understanding and managing your business. You need good information to make good decisions. Once you know what your numbers really are, you’re on the right path.
Good financial information leads you to ask the right questions about current costs and profitability. You might find overhead excessive in a down economy. You might find less profitable products or services that are consuming resources while dragging down your profit margins.
An analysis of your current financials will help you realign the business toward profitability today. Then, by comparing financial data across time, you can identify cost and profit trends that will allow you to adjust your business efforts to take advantage of coming opportunities or to avoid looming problems.
Here are some questions your current financial information won’t answer. These should help guide your strategy for the future.
- How big is the market for those more profitable products?
- Is the market growing or declining?
- What is your competitive advantage?
- What is your reputation in that market?
The answer to these questions will predict your future — long before you see the results in your financial statements. In fact, by the time you have real proof from the market, it may be too late to adjust your business.
Quite a few years ago we consulted with a client that produced and sold a market-leading memory card. They were experiencing declining sales and needed a plan to reverse the trend. They found that the product was on the verge of obsolescence as a more powerful technology was already taking their market share. Unfortunately, the time to invest in developing new products was long past and the company ultimately folded.
Here’s an example of how market information worked to create success in a seemingly poor market environment for a Mercury auto dealer in Odessa, Texas.
Joe White started with one benchmark for success, which was to “kick the butt” of the Oldsmobile dealership across the street. Unfortunately, Mercury autos were not held in high regard in the popular car magazines while the Olds Cutlass was a bestseller in the market.
Through market research Joe identified an emerging group of car buyers more concerned with other issues: Women who walked into a dealership to make a purchase were more concerned with their car-buying experience. They wanted to be treated with respect and courtesy in a low-pressure, honest environment. Joe committed his marketing and advertising efforts to that market and quickly succeeded in his goal.
Knowledge about your market strengths and weaknesses combined with knowledge of your financial strengths and weaknesses informs successful business strategies. You need both to predict your future.