1 + 1 = Profits: Don't Make Another Decision Before Consulting Your Spreadsheet
I took a “Decision Science” course once in college. It sounded innocent enough. Learn how to make decisions...with science! Sign me up. As it turned out, this “innocent” class turned into months of fighting Excel spreadsheets while trying to follow my professor’s break-neck speed instructions. Fortunately for me, my college social life afforded me AMPLE time to study on my own. Check: another expensive piece of paper to frame and leave in my guest closet somewhere…
What I have learned about decision making since then has become profoundly more relevant and useful than anything that was absorbed during that college course, and I have learned decision making can be very expensive without the right tools in place.
I once took a shiny new job as the head of finance for a small business. The job was a great fit with a fun, up-and-coming company who had just gotten over the success hurdle after years of toiling to stay afloat. The “coffers” were full of cash, energy was high, and the future looked bright. So, naturally, what would a business with new money and the wind at it’s back do? Spend! (Or, invest rather.) The company had started several new investment projects prior to myself joining the team, but, after joining, it did not take long for me to learn that the capital expenditures (or “money-making” projects) were far more expensive than originally anticipated! The money went fast, start dates were delayed, and profits became a distant dream. As it turned out, NO budget had been developed for these projects, and the company had no way to anticipate where the money was going or when to expect it to start coming in. Realizing this lack of guidance, I quickly implemented a decision science tool by creating several cash flow projections based on different potential outcomes. What we found using the cash flow tool was scary, but it finally gave us some visibility into what the future might look like, and it helped us realize which projects needed to be cut and which projects needed more capital to become profitable. This decision science tool helped to change our decision-making process and ensured we would always be making the most thoughtful and profitable decisions for our company.
This story isn’t new and it won’t be the last time a business owner “goes for broke” while attempting to re-invest into the business. But why is it that? Shouldn’t investing in your business be the safest bet in town? After all, who knows your business better than you do? Why is it that business owners often make decisions with “gut feelings” and not logic? Could today’s business owners be too busy to take the time to properly evaluate the options? Or am I not the only one who thought my statistics professor was speaking a foreign language?
I like to breakdown the business decision problem into three phases: 1) the idea phase, 2) the test phase, and 3) the implementation phase.
Develop. Test. Implement. Simple enough.
Developing the idea is easy, right? (Give me two beers, and I turn into an idea machine!) Most business owners understand their business and industry well enough to come up with great ideas to create more value for themselves and their business. But as we all know “an idea without a plan is just a dream.”
Implementing the idea can be a bit more challenging; however, business owners likely have the knowledge to implement technical ideas, and, if the skills needed to implement an idea is outside of a business owner’s competency, outsourcing has become a productive and economical option in today’s business environment.
So, we can develop the idea and implement the idea, but, why is it that so many business owners fail to test the idea and understand the true financial impact that the “Go/No Go” decision will have on their business and their lives? While there are likely dozens of reasons for not following through with the “testing” phase, I have discovered one common theme why business owners are not following through with analyzing their ideas: Time! Or, lack thereof.
Small business owners are busy people, and their time is the most precious resource they have. Seriously: who has time for numbers when you have a business to run? In order to effectively test a business decision, you need good information. In absence of a reliable, efficient accounting system, compiling the necessary information can be time consuming. Additionally, there’s a good chance we are not all trained accountants or financial analysts. Without expertise and additional free time, it’s no wonder the testing process gets bumped to the bottom of the to-do-list.
For the time-strapped business owner, it is hard to quantify the cost of avoiding the numbers. It often comes in the form of sluggish performance or business strategies gone wrong. To these folks, I say, “Are you achieving your goals and meeting your expectations? If not, maybe it’s time to let the numbers show why that is.”
If you are one of the few of us business owners who has determined to take a quantitative approach to your business decision making, I would ask, “how much time do you spend on your business finances? Now, how expensive is your time? Would your business be better off if you could spend that time focused on selling your business and fulfilling customer/client needs? Relieving yourself of this task alone could create instant profitability.”
If you operate “in the dark” or spend too much valuable time understanding your business finances, it may be time to explore outsourcing your “testing” process. Today’s outsourced CFO’s and CPA’s are positioning themselves to become their clients’ best business resource. Technology will ultimately eliminate much of today’s accounting compliance work such as tax preparation and bookkeeping. In the absence of commodity-based compliance services, accountants are being forced to move into the “trusted advisor” role, but I find most of the “number-crunchers” will not need to be forced into that role at all. Instead, we look forward to being able to provide a deeper value to our client’s business, and no longer be a “cost of doing business.” So, the next time you face a big decision for your business, call up your CPA or Outsourced CFO. Lean on their expertise to evaluate the numbers while you free up your valuable time.
My statistics professor would be proud to know that I have joined him in the quest to find answers in the numbers. He once said, “you can make any decision in life using numbers!” I would not suggest running calculations for everything (i.e. matters of the heart, calculating a response to your spouse, etc.), but using decision-making tools to test ideas has created valuable business insights and relieved stress out of running my business and for many of my clients. If you are looking for a new edge or to push your business to new heights, I sincerely encourage you to ask your financial professional to look to the numbers.