Get Real About Your Business and Avoid Reality-Show-Makeover Syndrome
Everyone knows the rescue-the-bad-business reality shows -- "Bar Rescue," "The Profit," "Hotel Impossible" -- and many viewers are hooked on watching Cinderella stories unfold. But all these shows have the same equation, with some rogue employees and bad finances thrown in for good measure. The result each time is an astounding makeover complete with new decor, top-of-the-line equipment and a new branding identity. The result? An overall change in attitude and a path back to success.
But all isn't what it seems in the world of "as seen on TV."
If you're unfamiliar with these reality shows, here’s the premise: A business owner, employee or someone with direct ties to the company reaches out to the show and describes the sorry state of affairs. The host visits the business and uncovers all the issues, kicking off the makeover process and transforming the company into what can pass as a completely new company.
It makes for terrific entertainment. But behind the smoke and mirrors is a company that has deteriorated due to poor business habits, lack of fiscal management and a constant cashflow battle. In real life, entrepreneurs shouldn't want to be rescued by any of these reality stars. Following three core practices will help you keep your small business thriving, growing and fiscally healthy -- without the need for a dramatic makeover.
1. Financial management with a key advisor.
Most small-business owners initially start their companies because they have a passion for something, want to be their own boss or are taking over a family business. Unfortunately, they very rarely have accounting and finance backgrounds. Only 40 percent of small-business owners rate themselves as “extremely” or “very” knowledgeable with respect to accounting and finance. Consequently, owners don’t manage the financial aspects of their businesses well. And how could they? They might not know what key performance indicators (KPI) are or how to measure them, they don’t understand whether their margins are appropriate, and they don’t have a forecast or any financial goals in place. It's no surprise they have very little idea of their cashflow needs or whether they'll have enough in the future to continue to run their business.
Regular financial management checks will give entrepreneurs a better understanding of general fiscal responsibilities, terminology and the levers that drive their businesses to be fiscally healthy (or unhealthy). Business owners with no financial background should work with their accountant or financial advisor to start. These experts can provide far more than tax help. They can give valuable guidance, help develop strategic forecasting tools and guide owners through best practices to keep the business on track.
Beyond tapping into a trusted advisor's knowledge, you can stay on top of your business finances by regularly reviewing numbers. Compare your actual results to the strategic forecast picture. This can help determine if you're on track with your forecasted goals, give you the information you need to make better financial decisions and reveal when you need to plan for emerging cash flow issues.
2. Strategic forecasting and planning.
To truly understand how growth affects their businesses, owners must put together strategic forecasts that also help predict cashflow needs. Entrepreneurs should spend time creating projections for revenue, direct costs, personnel and expenses. Then, they'll need to add in cash assumptions such as accounts receivable (how long it takes customers to pay) and accounts payable (the grace period to pay vendors).
If you hold inventory in your business, make sure you remember to factor it in your forecast. How many months of inventory do you hold? How much inventory do you purchase on a regular basis? Only with this sort of complete forecast can you actually know whether you'll need financing in six months or you have enough cash in the bank to sustain your business.
Business-rescue shows often paint the stars as heroes who swoop in to save a faltering company. In truth, they're applying basic tools to help the owner see what's really going on in the business. Strategic forecasts and KPI dashboards allow owners to see all their "missed assumptions" and create a recovery plan. For instance, implementing better invoicing strategies will help them collect money faster from customers so they can pay their own bills ahead of time.
Business owners can become their own heroes by doing a little strategic forecasting and making the time to review monthly figures. A number of affordable online tools can help owners effectively manage their businesses. Add in an accountant or other strategic advisor, and owners have their own recipes for success (minus the embarrassment of airing their dirty laundry on television).
3. Partnerships that make sense.
It’s not unusual for many business owners featured on reality shows to call in the reinforcements: friends and extended relatives who can help in different capacities. Uncle Joe might be the top-rated pizza flinger in town, but owners should understand that partnerships add complexity to any business. As a rule of thumb, it's best to avoid such a partnership unless it's absolutely necessary for strategic or financial reasons.
Why? Too many times, these complications ultimately can drown a business. A partner assigned to work on financial responsibilities might find him- or herself taking over the day-to-day operational tasks. When that happens, employees can't see a clear reporting chain. Miscommunications can lead to larger feuds and messy legal battles -- great for ratings but rotten for sustainability.
If a potential family partnership is the best avenue for your business, take the time to put together proper legal contracts. Specifically, you should detail contingency plans for the worst-case scenario. If your business crumbles, the last thing you'll want to face is a fight to the death with a relative-turned-partner. The cliché about too many cooks in the kitchen couldn’t be more true.
The sad reality is many small businesses are in poor condition because of business-management missteps. Owners profiled on reality shows may well have started their businesses with the best intentions, but they ended up in over their heads. TV ratings aside, some business-rescue shows might actually help a few companies recover and be profitable. It's not always a fairy-tale ending, especially if you've not done proper planning. Done well, forecasting will help you avoid the same fate as the business owners in the TV listings.