It’s New Year’s Eve and I often take time to reflect on the previous year. I call it an After Action Review, from my time in the Army. It gives me a chance to look at what went right, what went wrong, and what I could do differently. The do differently part is always the most exciting, mainly because I get a “do over”.
It’s interesting to watch children at play and see something that obviously doesn’t go their way, or causes disruption in the cadence of their game. They defer to the most simple of concepts and call a “do over” to remedy the situation. The “do over” is probably the single most overlooked solution by adults running a small business. If things aren’t going your way, just call a “do over”.
Too simple? Let me explain. Most of us can point to things that happened or decisions that were made during the course of the year that you weren’t exactly pleased about. This is most evident with the results your end of the year report card, known as the Income Statement. In business, disruptions in the annual plan cost you money. You sell too little, you generate too little cash, or you spend too much. All lead to either low operational cash, or low net profit – maybe both.
During your annual review, these issues stand out like a sore thumb. You see it when you are not hitting your sales goals on a regular basis. The further into the year you get behind, the greater the variance between your plan and what is actually happening. The longer this variance exists, the greater the impact on the overall operation of your business. When you see the gap starting to widen; don’t just keep moving along the same course of action. Call a “do over”, and reset your business plan to support your current sales level.
You might notice that you don’t seem to have as much cash as you planned for, even if you are hitting or exceeding your sales goals. Your business operation can only generate cash by selling goods and services, without selling fixed assets. This makes gross profit line the most important part of your financial management plan. A lack of cash is often the result of your pricing strategy. If you find that your gross profit is lagging behind your plan, you could have miss-priced your goods or services. As the margin begins to erode, monitor it carefully. The lack of dollars generated in gross profit are reflected directly in your net profit, if you don’t also reduce expenses. Don’t take a pay cut; call a “do over” and address the problem with your pricing.
Sometimes the “do over” comes in the form of expense reduction. Your sales plan is operating efficiently, but you don’t seem to have a net profit to show for all of your hard work. It might be that you have taken on additional expense that you don’t need to have. The least popular expense cut is in salaries, but it has the largest impact. If you have staff that seem to be less productive than in the past or the revenue to support the position never developed, it is time to reduce your headcount. Of course you can look at other opportunities to reduce expenses, but many do not have the same marginal impact as having the proper amount of staff. Don’t eat the difference in net profit, call a “do over”.
I just happen to be thinking about this on New Year’s Eve, but the concept isn’t limited to a specific point in time. Think about children playing a game. Anytime your business seems to get out of its rhythm, stop and call a “do over”. Your business will thank you with longevity, cash, and profit.