The first step in building the value of your business is checking its health. Doctors listen to your pulse and perform a variety of tests when they give you a physical examination. Business owners need to follow diagnostic steps similar to a doctor’s physical examination before making any serious business decisions.
The business self-assessment involves more than just looking at financial data. This is a time to step back and thoroughly evaluate the business. You need to find out what hurts and locate the source of the pain. There is no magic formula. Business owners need to face the hard cold reality. Can the management team effectively conduct a self-assessment? It’s possible if they open their eyes and ears and leave their egos in the closet. In other instances owners and management engage in a process of deception and denial. If you think you can peel back the onion, then move forward and go for it.
Take a Look from Top to Bottom
A business assessment should encompass the state of the entire business. This means evaluating the economic outlook of your industry. Act as if you were an objective independent consultant and drill into the real facts surrounding the business. This isn’t a process of strategic or operational planning. Understand what is happening in your industry and the position of your business.
The first thing to wrap your arms around is cash flow and liquidity. What kind of shape are you in? Can you meet payroll? Are you in violation of loan covenants? How are sales holding up? Are customers satisfied and what are your prospects for the future? What’s the future of your industry and how are your competitors doing? What are vendors really saying about you and your business? Is there any high risk of fraud? Are our tax filings up to date and have all of our taxes been paid? Get the big picture as fast as possible.
How Bad is It?
After asking the key questions, it is time to evaluate the state of the business. How bad is it and to what degree are you in hot water. You are going to find that three conditions will emerge. You might need a tune-up. On the other hand a turnaround might be required. Last hope you’re not in a state of crisis. Let’s talk about these situations in more depth.
A tune-up situation is the easiest to deal with and is revealed by a variety of different signals. Have your earnings started to decline? Has sales volume dropped off? Maybe you will see that your employees aren’t as motivated. Are you able to effectively introduce new products or services? Have efforts to gain market penetration gone as well as anticipated? The signals will show that you’re not in the tank but that you’re not doing as well as you think.
Turnaround situations are evidenced by a shift from profitability to losing money. Another indicator is excessive levels of inventory. I like Dell’s comment on inventory being like fish. “If you have them around too long, they start to stink.” You might be struggling to hire good people. Do you know why you sell the products you sell in the markets in which you are selling? Have you lost business to competitors? These situations aren’t fatal, but they require attention and corrective action.
A crisis is a different story. What if you can’t meet your payroll? Can you extend your lines of credit at your bank? Have key managers and employees left? Will your vendors still ship goods to you on credit, or do they demand COD terms? Have customers stopped ordering, especially the ones who are slow to pay? Have you taken time to think about the future or have you just been running around putting out fires?
While the above scenarios relate to businesses, CPAs can apply the questions to themselves or to their clients. I just thought these were invigorating thoughts and questions in starting the new decade.
See www.northrupcpa.com/blog for more information and tools on conducting business assessments.