Your business doesn’t have to just stand there and take every punch that the competition or the economy throws at you. By predicting the future you can learn when to dodge, when to block and when to bust a few moves yourself.
When it comes to business, the main obstacle to predicting the future successfully is ourselves.
Whenever there is a performance issue we tend to blame outside factors instead of ourselves. It’s the economy, the weather, the big-box competition…the usual suspects.
It is probably some sort of psychological survival mechanism that allows us to function in a world over which, it seems, we have little control. That makes it understandably human, but in business it can get in the way of taking action in time to dodge or address a threat before it knocks us silly.
Bank lending officers are very good at recognizing this side of our human nature. Usually they meet business borrowers several times a year in order to review the latest financial results for the business.
After being through hundreds of these sessions experienced bank officers recognize most of our defense mechanisms and work through them. Their job isn’t to harass you (although it can seem that way to a busy entrepreneur sometimes) but to see that you are taking actions to ensure that your business will survive and prosper.
Business owners often approach these meetings with a combination of dread and survival instinct. The abiding concern of this instinct is to prevent the lending officer from losing faith in the borrower’s management team and the “story” behind the enterprise.
That may get you through one meeting but it is not likely to get you through two, certainly not with an experienced loan officer.
Instead of viewing these meetings as an obstacle course that must be endured, most businesses would be better off if CEOs approached the meeting as an opportunity to test their analysis against the experience of the loan officer. There is no doubt that the CEO knows the business better than the lender, but the lender often has a better idea of what can, and cannot, be determined by analyzing a financial report.
A financial statement is a description of what happened in the past, but you can use your analysis of it to predict the future. Generally speaking, things don’t just happen to a business. Mostly they are the result of decisions made and actions that you or your competition take. Forces such as the overall economic climate affect your business, too, but not as much or as often as we might think.
Eventually, of course, the impact of the actions made shows up in the financial statement and is, more than anything else, the result of actions you initiated, took in response to other’s actions, or failed to take in response to changes.
Even the most humdrum elements of a financial statement, the parts people usually skip over, are trying to tell you about the future. There is general agreement that the portion of the statement that people find the least interesting is the fixed asset accounts. But even there, the numbers are telling us a story about the capital strength of the business and how that will affect its future strategy and tactical moves.
The income statement accounts dealing with profit margins are the real treasure trove of data with predictive value, though. Look first at the operating margin, the profit earned from sales after you deduct the cost of goods or services sold. Here you should be prepared with some recent history of that margin, for this could be significant in deciding how to respond to any challenge.
Margin shrinkage due to rising costs may not be directly related to your competition, for example, while shrinkage due to price or revenue declines often reflects competitive pressures, and some loss of your customer loyalty.
The answers to these questions prompted by the financials are in your sales and customer analysis, but to make solid predictions of the future you have to become practiced in how to spot “pre-emergent” problems by analyzing the balance sheet and income statement.
If you are feeling a bit uncertain or just rusty in that area, your lending officer or a trusted adviser can probably help.
Most entrepreneurs and successful CEOs tend to be what the psychologists call, “action-oriented.” Taking the time to analyze your financials shouldn’t, and won’t, change that, but it may help to focus those actions and find a way for your business to succeed — no matter what the competition throws at you.
James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.
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