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  • Ed Patton

Driving Your Car & Your Business

Updated: Oct 5, 2020

You’re Responsible for Upkeep, Maintenance & Repair.


Your business, like your car, is a complex dynamic system with many interdependent moving parts and the better they are operated, maintained and “tuned” for their purpose, the better your business will perform.


And, just like your car does nothing without a driver responsible for its operation, your business will not function properly or at all, without you taking ultimate responsibility for its upkeep, maintenance, and repair. But how do you do that?


Keep Your Eye on the Fundamentals.


Every automobile—whether a Ferrari or a family minivan or an old pickup truck—is based on the same fundamental dynamic components, just as every business—whether a manufacturing company, distributorship or service business—is based on the same dynamic financial fundamentals. If you want to ensure your car’s performance or your business’ success, it is key is to carefully monitor the fundamentals.


None of us would ever attempt to drive our car without relying on comprehensible gauges that clearly showed our ever-changing speed, mileage, tire pressure, etc. Without those monitors, we know there would be many potentially undesireable outcomes.


Similarly, in our business, we must know:

  • Do we have enough fuel to get to our destination / is there enough liquidity to implement and accomplish our business goals?

  • Is the car running smoothly / do we clearly understand our business’s cash flow?

  • What is the car worth / what is the value of the business right now?

  • How much debt is appropriate if you want to purchase a new car / how much debt is appropriate for the business?

If we can monitor these key elements – cash flow, liquidity, value, and borrowing capacity – we can stay on track.

 

But what if the data we are getting is not truly reflective of what’s happening in our business?


Are You Getting the Right Information?


 

Far too often, decision makers (DMs) of small to mid-sized businesses (SMBs) feel like they are operating in a financial-knowledge vacuum.


Why is this? Because it is true. Why does this happen? Most often this is because the financial reporting they are given does not completely, accurately or understandably show how the dynamic financial fundamentals of their business are performing.


The financial reports they get are “rules-based” instead of economic-based or business reality-based.


Their CPA provides them with financial reports based on GAAP or tax codes that align to the needs of the federal government or other third-parties but do not show the current, past or prospective dynamic performance of their business.


What they really need are concise reports that provide comprehensible financial fundamentals. Below are a couple of examples of the clarity that leads to better decisions, when you are provided comprehensible financial fundamentals.


Case Study #1

A forty + year-old distribution company was losing money and becoming financially weak. The business had several business lines along with a good amount of debt. These factors, along with fluctuations in working capital items, contributed to the difficulty of grasping the actual foundational financial business activities of the company.


Every month, the leadership team looked at the reports their financial professionals provided them, but they really didn’t provide a clear picture of what was happening in their business. They had a good grasp of the P&L amounts and knew what they owed the banks and the government in taxes, but they couldn’t get a clear picture of what was going wrong. They also knew they were about to steer off a cliff, but because of all of the financial moving parts they didn’t know why.


When the DMs were provided a common sense, condensed and comprehensible graphs and supporting schedules of foundational cash flow and financial strength amounts plus drivers they quickly realized their underlying financial weakness and its culprits and began developing a plan to remedy these problems.


Case Study #2

The owner of a business knew his monthly P&Ls really well. He studied them and had a sound comprehension of sales, margins, operating expenses and earnings. Yet, while he knew what was reported on the P&L, like many CEOs, he could not get a solid grasp of the business’s cash flow because the cash flow reports he received were both confusing and misleading.


Unfortunately, the company’s controller and operations managers had decided they could enjoy the benefits of reporting better P&Ls by recording some expenses as capital expenditures. Over time, the frequency and amounts of these inappropriate reporting activities increased.


When the DMs were provided with a common sense cash flow statement, they instantly realized what was occurring and implemented effective remedies.



Knowing Your Fundamentals Leads to Better Decisions.

We all understand that having a grasp of our car’s operating fundamentals, on an on-going basis, will lead to better decisions while we’re driving and throughout the period we own our vehicle.

 

The same can be said for a business.  As a business DM, comprehending all of your business’s financial fundamentals leads to consistently making better and more informed decisions.


Patton Trender is committed to providing every SMB DM with comprehensible financial fundamentals that put them back in the driver’s seat of their business.



 

-pattontrender.com-

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