It’s surprising what understanding a business’ accounts can tell you.
I learnt my “Business Banking” in Hong Kong lending to small traders who sold anything anywhere if they could make money on it. They didn’t have accounts audited by the “Big Four”. You had to meet the owners and see the business for yourself.
The accounts were always a good place to start. However, you had to look at what lay underneath the actual numbers to understand what drove the business, and what the owner’s plan was. You had to get close to him or her, and to be able to react quickly when things changed.
I was recently asked to have a look at the accounts of the client of one of my professional associates. The client’s margins were falling, and he was worried that he might have to raise prices. Not perhaps the best thing in a recession?
I looked at three years’ worth of accounts and suggested that the business should implement a budgeting and review process. On being asked how I knew that they didn’t have one, my answer was simple – the numbers told the story.
There was more: the business’ book keeper wasn’t consistent in the way that he/she passed entries, and the business’ auditor had signed off on some glaring inconsistencies.
In all, the numbers in the accounts didn’t reflect what was really going on. Valuable financial information on which the owner would base decisions was either not there, or was wrong. This could have been disastrous if the owner was making decisions based on inconsistent financial information. Worse if he/she was looking to borrow money from a bank or an “angel investor”.
Good accounts can tell you so much about your business: where it’s making money and how much and where there are problems. With a few simple tools, you can see whether your business is becoming more (or less) efficient, debtor collection trends, your ability to service bank loans, and whether your business is sufficiently “liquid” to cover its debts as and when they fall due. What’s more, once you’ve spent the time setting up the tools you need, you don’t need to change them very often.
Knowing what’s going on in terms of your numbers gives an added advantage: you can talk confidently with accountants, bankers and investors. Many entrepreneurs are nervous in front of these types, but “knowing your numbers” gives you all the backup that you need.
I was born overseas and have spent more than half my life working in different world markets from the most developed to “emerging” economies. With more than 20 years in the world financial services industry running different service, operations and lending businesses, I started my own Performance Management Consultancy and works with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by
email. I recently published
Financial Management For Small Companies Made Simple – an easy-to-read basic guide to business finance. My
website provides an excellent picture of my rich and varied portfolio of services.
Labels: Financial, Risk, Strategy
Do You Know Your Risks?
The world is littered with examples of companies and organisations that failed because they didn’t manage their risk effectively.
“Risk” means different things to different people and organisations. Since 2007 for example, the debate has raged over how much “risk” banks took, whether they and the rating agencies understood it and how much they should take now.
Some businesses and organisations have got risk management down to an art, others have further to go. One thing is: risk management is as much of an art as it is of a science.
In order to manage risk effectively, you have to be able to identify and measure its impact on your organisation. There are different types of risk, e.g. financial risk, operational risk, market risk and so on.
Identification depends on a number of factors, both internal and external. An organisation needs to identify to which internal and external risks it is likely to be subject.
Once you have identified the risks, you need to measure how much they could impact your business or organisation, and the likelihood of them happening. The higher the impact and likelihood of a particular event arising, the more significant its risk and the more effort you may need to put into managing it.
Managing risk can take various forms, including taking no action at all (yes, this is an accepted strategy!). Your chosen risk management strategy for a particular risk or group of risks will depend on a number of factors including likelihood and impact, cost of managing the risk and even what others do.
As an example, people choose to insure their car either because the institution lending them the money tells them to, or because they choose to so that, if hit by someone else, they will receive compensation (well, that’s the theory anyway). There may be circumstances where they choose either to take “comprehensive” cover, to take only “third party” liability or maybe even not to insure at all.
To summarise, risk is everywhere and we all have a basic grasp of it. We accept some risk more than other types (e.g. most of us don’t think twice about walking across the road, even though a higher percentage of people are killed doing this than jumping out of an aircraft with a parachute).
A prime example is staring us in the face now following the earthquake and tsunami that hit Japan over a month ago. Manufacturers are finding that “just in time” stocking techniques have all been upset by no parts ex-Japan. The alternative suppliers are not working flat out to fill the gap – and charging accordingly!
Have you identified your risk and what you can do about it?
William was born overseas and has spent more than half his life working in different world markets from the most developed to “emerging” economies. With more than 20 years in the world financial services industry running different service, operations and lending businesses, he started his own Performance Management Consultancy and works with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, he can be contacted by email or via his website which provides an excellent picture of his rich and varied portfolio of services.
Labels: Crisis Management, Customer Care, Financial, Risk, Strategy
