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Early Indicators Of Poor Fiscal Fitness

November 22, 2009

On your initial visit to a doctor’s office you will customarily be asked to complete a questionnaire concerning your personal and family medical history. Have you ever had these habits or symptoms? Has anyone in your family ever had these diseases?

Why the negative questions? They are helpful diagnostic tools for determining conditions, tendencies or habits that may be an indicator of an increased probability of certain difficulties. It helps the physician spot a condition that, if recognized early enough, may be successfully treated to avoid further problems.

A recent study identified ten management conditions that were commonly related to business failures. While a medical history questionnaire is for early diagnosis of potential physical problems, these ten conditions can form the basis for a management questionnaire to insure your fiscal health.

1. Inadequate Record Keeping. Even the sharpest of minds in the smallest of businesses need adequate information to make profitable decisions. Companies that end up in bankruptcy proceedings invariably have poor record keeping systems.

Profitable sales are a hit and miss operation without adequate cost information. Your ability to control operating costs on a timely basis is dependent on knowing those costs on a timely basis. Inadequate management information can be evidenced by not enough of the right information or too much of the wrong information.

2. Cumulative Losses. Damaging business losses occur from the cumulative effect of little leaks in profitability. Without the cumulative drain of the little leaks, your business will be healthier in good times and be able to withstand the shocks in bad times. While traumatic events appear to trigger business failure, it is a traumatic event impacting a weakened structure that results in most failures.

3. Growth. While growth is an objective of most all businesses, a period of rapid growth often is a predecessor to financial difficulties. Rapid growth will place a strain on a company’s internal resources and systems. It is accompanied by increased expectations from its customers and the possibility of new competition if those expectations aren’t met.

4. Product Development. Retaining and even investing in obsolete product lines is a tendency shared by troubled companies. It’s difficult to determine when a “bread and butter” product line is past its prime, but it’s a decision that must eventually be made. If all successful products have a finite life, a company must be able to develop new products to stay in business.

5. Customer Information. A set of customer needs defines a business purpose. A business that doesn’t know its customers will never reach its potential. Companies with a small customer base are especially vulnerable. How broad is your customer base and how intimate are you with the current needs and future directions of those customers?

6 Family Business. The transition from one generation to the next is a particularly vulnerable time for a successful family business. Adequate preparation of management successors is a difficult and sensitive task. A business that serves its customers first, will serve its family best.

7. Management. The development of managerial skills generally lags behind other areas resulting in a dangerous lack of coordination and confusion in a growing business until such time as appropriate management and administrative systems are in place.

One person management, the most common and effective system for getting as business started, eventually becomes a limiting factor. An inadequate understanding of the impact of one person management is a common factor is the disappointing results from investor buyouts of entrepreneurial companies.

8. Internal Conflict. The internal conflict that develops as the objectives of partners grow apart are an unfortunate cause of business disruptions. Partnerships should have written agreements that contemplate the potential dissolution of the partnership.

9. Technical Competence. Entrepreneurs starting something new and investors that are anxious to diversify are often accidents waiting to happen. Many business problems can be quickly traced to a lack of technical, marketing, or managerial competence in a new industry. That doesn’t preclude one from being successful in a new area, but it does argue for gaining experience and seeking advise prior to starting.

10. Neglect. Unpleasant surprises spring from the sea of neglect. Absentee management is common warning sign of a potentially unhealthy situation. With competent management and good communication, absentee ownership can be successful. Absentee owners who retain significant managerial power will have problems.

Because its your business, check your level of fiscal fitness for the early warning signs of poor health.

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