Re•li•a•ble (adjective). \ri-ˈlī-ə-bəl\
- Capable of being relied on; dependable
- Yielding the same or compatible results in different clinical experiments or statistical trials
Every small business owner I have worked with believes that they are reliable. They throw around amazing statistics of repeat customers, on-time service and high net promoter scores (if you don’t know what that is, call me). You can count on their product or service and that’s what differentiates them from their competition!
No surprises here — I would expect nothing less. Yet this is why it is absolutely amazing that the majority of these same small business owners do not have reliability where it really matters – in their financial statements. To be a truly great enterprise, you have to be reliable in every function of your business. Sales, Operations, Marketing, Information Technology, Human Resources, Strategy, Facilities Management – and Accounting & Finance!
Remember, the goal of a business is to Maximize Long-Term Shareholder Wealth. The only way this can be done is by implementing a world class Financial Management System, as summarized below:
- Goal: Maximize Long-Term Shareholder Wealth (i.e., Firm Value)
- 3 key functions:
- Analysis
- Relevant and Reliable Financial Statements
- Detailed Analysis (common size, actual vs. prior yr/plan/forecast, ratio analysis)
- Planning
- Which projects do we invest in?
- How do we finance the chosen projects?
- What is the optimal liquidity policy?
- What is the optimal dividend policy?
- Internal Controls
- Administrative controls
- Accounting controls
- Analysis
- Based on these 3, Investors develop a risk-return profile for the Company
- Perception of Firm performance
- Overall financial environment factors
- Industry-specific risk factors
- Company-specific risk factors
- Resulting Firm Valuation
Pay close attention to the first bullet point under the Analysis function. There’s that word: reliable. If you are a business owner and you are publishing financial statements that are incorrect, then you will never achieve your goal (in the long-term, which is what the focus should be on!). It’s that simple. Perhaps you will make a bad decision based on flawed numbers, leading to a destruction of value. Or, maybe you will provide flawed numbers to investors or creditors and they will detect the flaws and increase their perception of risk (which makes your cost of borrowing higher and decreases the value of your business!). Regardless of how it happens – it will happen. The good news is that we @Team13System have experience working in world class financial management systems. We have also helped build world class financial management systems in small companies. Finally, we have fixed broken systems. It’s not easy – but if it was easy, it wouldn’t be fun…and it all starts with being reliable. Are you?