Tips For Better Small Business Decision Making

Many large public companies today are focused on making the "numbers" look good to prop up their stock price to make millions on stock options, even while heading for bankruptcy. Remember Enron? Many small and mid-sized businesses are also at risk, by focusing on the wrong things, but for more sincere and honest reasons.

The common problem I see is that many businesses 1) Focus the majority of their efforts on the wrong areas, i.e. top line or even the bottom line and 2) Don't have the reporting tools for optimal management. Most businesses utilize "Accounting" reports that are produced by accountants for accountants (or bankers) rather than as a tool to help manage their business. To make matters worse these reports are often very untimely. What good is are accounting reports months or even a year after the fact?

The solution? Manage for cash and produce your own reports to manage your business. You should also manage your daily business with an eye toward how decisions will affect your future cash flow. If you don't have enough cash to meet payroll or pay your bills it doesn't matter what your top or bottom line is.

To accomplish this you need a Cash Flow Statement for what happened in the past month, year, etc. and a Cash Flow Forecast that is a "living document", one that you update frequently. If this forecasting tool is done right, you will find it invaluable. These reports should cover such things as changes in Accounts Receivables, Inventory and Capital Equipment. And while these items are covered in a businesses standard Balance Sheet and even in most Cash Flow statements, these reports are not very easy to understand. Additionally, you need timely Management Reporting (not accounting reporting), which should include key business statistics specific to your industry and business. Many of these statistics will not be in dollars and cents and would include items such as Gross Margins, average sales price, accounts receivable aging, and product or service produced per hour of labor, just to name a few. A good statistical management report is something you could just glance over and see right away the problem areas that need addressing.

This additional effort to produce your own timely informative management reports and the change in focus to Cash will not only drive you to better decision-making, but will help you avoid most surprises so you sleep better at night.

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