Most people are aware of loss contingencies, where a company writes down a portion of an asset when there is a likelihood that a loss will occur. Some companies have insurance policies to protect from loss, others take the write down. A loss contingency is used is to account for invoices that may not be collectible. You can see this pretty regularly as an Allowance for Bad Debt. The loss hasn’t occurred yet, but history shows that it is likely.
As I work regularly with bankers, commercial lenders specifically, I’m frequently involved in conversations about the pressure of sales growth. Revenue growth isn’t unique in business by any means, but it takes on a slightly different angle in banking. Banking resides in a sales category one step removed from where sales typically resides.
What I mean by that is — most bankers I talk to call themselves relationship bankers. In fact, Relationship Manager is the most common title used for this position. They are set-up very well by the bank. They have branding and fantastic products behind them. They have a great presence about them, — their dress, ability to communicate and demeanor. I love the sales environment they’ve created. When a business owner walks into a branch, the relationship manager exudes confidence and personality. He’s in the best spot in the world from a sales perspective. But the next moment is critical.
There is simply one rule to live by in small business if you want to stay in business. The rule is the change in your operating expenses should mirror the change in your gross profit. This is typically called expense control. However, it should be called the essential function of a business. It’s essential because without it your company will die.
The saying goes, “If you want to know what a person thinks is important, just look at where they spend their money.” It holds true in your personal life as well as your business. It is also very hard to hide from your employees, competitors and customers. They see where you invest and draw a conclusion as to what your spending means. The question you should ask yourself is, “Does the message say what I want it to say?” Let’s hope that it does.