I recently watched the 94th race of the Indy 500 from my easy chair at home and memories came flooding back of a race I attended as a Horizon Industries territory manager and a guest of Allied Chemical more than 20 years ago. It is truly an amazing event combining not just the sounds of screeching tires and finely tuned engines, but the smell of the food, the noise of the crowd, for a total experience.
Dario Franchitti won the event for the second time while taking a gamble on the last lap of the race, with a gas tank screaming empty. No one on his crew knew if he could sustain the remaining lap without a pit stop. Fellow racer Tony Kanaan was not willing to take such a risk, and as Dario’s biggest threat at the time, he ducked out to refuel, knocking himself out of the running. Franchitti made the decision to keep going that last 2.5 miles and that decision ultimately paid off with a $2.75 million paycheck. Because of a major crash during the race, Franchitti was able to conserve enough fuel for that final lap.
Even at speeds of more than 200 miles per hour, Franchitti was able to be aware and take in the information around him, so he could make good decisions. It seems that to fuel or not to fuel was this race’s toughest decision. Franchitti made the decision not to fuel and that decision won him the race.
Every day, business owners need to make decisions, not at speeds that Franchitti was traveling, but decisions that will determine whether we win or lose. Last year, every 12 minutes, a retail business in the U. S. failed. That’s over five failures per hour, every hour, every day. These are failures because of poor (or lack of) decision-making.
Surprisingly, the top five reasons for business failure have nothing to do with poor sales as expected in this economy. If there is any good news, it is that the most damaging forces for retail businesses are in fact controllable variables; variables that are managed by decisions and choices. These decisions may not be easy; many are very anguishing. In this economic climate, the most uncontrollable variable of all is the customer.
So what are the top five reasons for failure? They are: #5 - Out-of-control growth or expansion; #4 - Mismanaged expenses; #3 - A period of declining Gross Margin; #2 - Out-of-control inventory; and #1- Running out of cash.
Businesses may not be able to control the customer, but they can control expansion and growth, expenses, inventory, and even margins – all of which affect the availability of cash.
Keep focusing your resources, energy, and efforts on those parts of your business that you can control. Those are the ones that are most likely to cause their businesses to fail. As they focus their energies, good businesspeople will immerse themselves in information that will help them with the often difficult decisions and choices they will have to make for survival.
Logical decision-making is an important part of all professions, where specialists apply their knowledge in a given area to make informed decisions. In some situations, like with an Indy car driver, intuitive decision-making rather than structured approaches can be used.
Whatever your decision-making process, it is critical to immerse yourself with information to give your mind data on which to ponder. Without solid information, you will be working in the dark. Without information, you may as well resort to flip-ism, i.e., flipping a coin, cutting a deck of playing cards or using tarot cards.
The most important information needed comes from your financials. If I were to ask about your last business financial statement what would you say? Some of my clients have said: “It told me that we made a profit,” or “It’s just a year-end summary.” While a financial statement does provide that information, it is really much more. It provides vital clues to what’s right and wrong in a business. You don’t have to be a CPA to read one, just familiar with the basic accounting terms and what they mean.
It’s critical for a business owner to learn to read a financial statement and use it to gather information to make good decisions and choices for their business. Are you reviewing your income statement, balance sheet and statement of cash flow monthly? If not you are working in the dark!
In addition, a good manager should know how his/her business compares to other similar businesses by knowing industry averages. For example, what is the industry average for gross margin, sales per employee, sales per salesperson, operating expenses (rent, wages, etc.), net profit, average ticket, closing rate, etc.? These numbers help business owners benchmark against others and identify areas of potential targeted improvement. Knowing these numbers helps make better decisions.
The World Floor Covering Association (WFCA) recently announced an opportunity for all flooring retailers to participate in the Financial Management Report and benchmark their businesses for free. Participation is probably the best thing one could do for their business. Al Bates from the Profit Planning Group is conducting the survey and keeps participants’ proprietary company data strictly confidential.
My clients pay money for me to do this research for them and the WFCA is doing it for free. Why would anyone pass up this critical information for his/her business?
Capitalism is mean. It is survival of the fittest. The fittest survive because they use solid information to make choices and decisions for their businesses. Armed with your financials and with information about how your business is benchmarked against similar businesses will give you that needed information.
You will have a much greater sense of control as you make good decisions, just like Indy racer Dario Franchitti. You may not win the Indy 500, but you will definitely have more peace of mind!