It may sound strange but everyday we discover business owners who have found new ways to ignore their businesses. While some of these approaches are novel, most follow a common pattern. If you want to succeed, learn what NOT to do from these examples.

1. Manage from the check register: Many business owners use their bank balance as an indicator of financial health. If the balance is high business is good, if the balance is low it's time to go get more business. Using your cash balance as a key performance indicator fails to address the long range planning needs of the business. Any business can generate cash by harassing customers for quick payment, paying vendors late and running up credit card balances. That doesn't necessarilly mean the business is in good shape. Smart business owners learn how to read financial statements and understand the relationship between the balance sheet, the income statement and the statement of cash flows.
2. Wait until tax time to plan for taxes: In this case the better a business does the more trouble it can get itself into. Effective tax rates for the uninitiated business owner can easily reach 40%. How many business owners who gross $100,000 in profits are prepared to right a $40,000 IRS check? Not many. Taxes should be addressed quarterly and the cost of being successful should be factored into your pricing and overhead allowances.
3. Hire without a job description: If you don't know what you're looking for you're sure to find it. Businesses who hire out of desperation are bound to make bad decisions. Payroll costs are often the most expensive part of owning a business, but it is amazing how many people address this critical element of the buisness in a haphazard fashion. If you are unsure of how to obtain the right person spend some money on an expert who can guide you. An executive coach or recruiter can screen candidates and determine who is the best individual to help your team succeed.
   
4. Operate without a budget or forecast: Individuals who don't set goals will always be the servants of those who do. The same holds true for businesses. If your organization does not have targets for the month, quarter and year it is not performing at optimum levels. Experience has taught us that these firms are also losing business to competitors and they are failing to create value for their owners. A business without a budget and sales forecast wanders aimlessly through its market and is a ripe target for competitors.
5. Assume "market rates" will keep you competitive: A dirty little secret of business is that many firms "sell" their way into bankruptcy by failing to understand the amount of profit required on each job to remain in business. Pricing your product according to the competition will not guarantee your future. You must understand your gross margins, your monthly overhead and the seasonality of your business. It is almost a certainty that your overhead and materials prices are NOT identical to your competition. Why then would you price your product identical to the competition. If market pricing isn't enough to keep you in business you must find a competitive advantage somewhere else before it's too late?

Part of our practice is helping investors evaluate businesses so they can determine whether the deal is worth doing. We also help sellers of businesses understand the different things buyers will look at and we help them address potential problems before negotiations begin. Three things surface in almost every deal that can reduce the value of the business. Whether you are thinking of selling or not, addressing these areas will improve your business.

Define your sales cycle. Very few businesses know how many leads they must generate to get a prospect, how many prospects they must call to get a presentation, and how many presentations it will take to close the deal. There are other metrics such as average sale amount, customer retention rate, referral rate, etc. that are critical to squeezing efficiency and higher profit margins from existing businesses. Buyers of businesses want all of these figures so that they can determine the internal growth prospects of the business (how much the business can grow by improving internal processes alone). Existing business owners who don't understand these numbers are giving away sales. Push your sales people to build a sales model that quantifies, on average, exactly what it takes to get someone to buy your product or service and you will be more advanced than 90% of all business owners.

Define your market. Most businesses that have been around for several years take for granted that the market will support future growth. However, if you cannot say how much growth then your "gut feeling" is just an opinion. Investors go to great lengths to quantify market size using statistical data, census reports, and competitive analysis...and they don't even own the business yet. If you own a fast food franchise you had better know the average drive through business of your nearest competitors. How do you get this information? You pay one of your employees to sit across the street and count cars! This is not rocket science but 99% of businesses don't do it.

Know your break-even point. Break even is the amount of sales it takes to keep your doors open. If you are below break even you're either using up savings or you're going in debt. If you are operating above break even then you're realizing a profit. How many businesses do you think know their annual, monthly, weekly, daily and hourly break even amounts? Our experience is less than one in twenty, and the real number is probably less than one in fifty. Break even gives business a sense of urgency. It also helps the owners distinguish a profitable option from the most profitable option. Decisions that help you get to break even faster, or that lower break even, or that guarantee a higher probability of reaching break even are invaluable in achieving new levels of profitability.

You may not be planning to sell your business today, but if you act like you are you will find many ways to improve your operation? Give us a call if you need help getting started.

The fourth quarter is in full swing and that means year-end closing procedures are just around the corner and tax returns are soon to follow. Here's a checklist of things to take care of over the next two months.

Schedule your year-end planning appointment. Call your CPA and schedule an hour to an hour and a half to go over the year to date numbers. Make sure you have a set of interim financial statements to send a few days ahead of time. Also, before you sit down with your CPA write down the major decisions you face over the next three to four months. Issues such as whether to hire new employees, buy new equipment, renegotiate leases, etc....all have an impact on your tax situation and you should discuss your options now.

Review closing procedures. Closing the books used to take weeks after year-end. Now it can take hours or at the most, days. When working with a company's accounting staff we map out exactly what has to occur for monthly and year-end closes. Then we start scheduling and crossing off all the items that can occur before the period actually ends. Depreciation entries, expense accruals, and daily cash reconciliations are items that don't need to wait until the week after month or year-end. Most companies we work with can have their books closed by the close of business on the first day of the month. For a lot more on this topic buy Steven Bragg's book "Fast Close."

Examine your inventory. Inventory is a big item most people dread at year-end. This is usually because they only pay attention to physical counts and stock locations once per year. Unless you're in retail the next two months will be some of your slowest. Holidays and year-end budget constraints mean many of your customers aren't making purchase commitments until January. Take advantage of the slow down to identify and remove obsolete inventory, clean up the warehouse, and review the problems with last year's inventory. A little planning can go a very long way. Every couple of years hire an outside expert such as a CPA firm or an inventory outsourcing company to oversee your procedures and make recommendations for improvement.

Review IT and infrastructure needs. Sit down with your network administrator or technology consultant and go over the things that will need to be upgraded or replaced over the next year. Holiday sales and year- end close outs aren't just for retail shoppers. Businesses can take advantage of inventory reductions and post holiday sales slumps to cut infrastructure costs. However, it's best if you have a coordinated plan and can spend your dollars where they will produce the greatest return on investment.

Schedule some quiet time. You're bound to have a little time to yourself over the next two months between turkey day and unwrapping gifts. Take advantage of the opportunity to do some goal setting, map out your plans for the next year and think strategically about your business. Whatever you do, write your plans down. Don't let something as important as your business become another forgotten new year's resolution. Thanksgiving, Christmas and New Year's holidays provide three long weekends where you can brainstorm, write a first draft, and then finalize your plans.

If used wisely the last quarter can be a valuable strategic planning opportunity. While your competition has checked out for the holidays, use this time to gain an advantage and hit the ground running in 2007.