Roadmap

Human nature is a funny thing. We seem to enjoy operating "on the edge." Business and financial experts continually tell us to plan, plan, plan; but usually we don't. We wait, wait, wait.

We hear a lot about preventive maintenance. But we often wait until we're sick to go to the doctor. "If it aint broke don't fix it!" So we wait for the symptoms of problems to appear, and then we respond - but sometimes it's too late.

In business, of course, we call this approach "seat-of-the pants management." In business and trade journals, it's been praised and romanticized: the entrepreneurial spirit . . . the go-for-broke, gut-feel attitude. Yeah, right. Now, don't get me wrong. I believe in these attitudes, but they need to be put within a structure - a framework - which capitalizes on the strengths and shores up the weaknesses in a business. The diagram you see presents just such a framework.

Functionally, the roadmap represents the financial skeleton of your business. As you can see, it's a self-contained system; however, as with any system, it requires maintenance to function properly.

Problems - in business or any where else - are solved when we get to the causes. Unfortunately, we often fail to get to the roots of problems; instead, we flail away at the leaves. Medically speaking, we call these leaves "symptoms." But doctors only treat the symptoms of a disease when the causes are unknown. Financially speaking, we usually recognize these symptoms as low cash, low net profits, or both.

But low cash or low net profits are caused by something. And that's where the diagram becomes useful. It presents the "big picture" overview, but at the same time lead us through a process of analysis designed to pinpoint potential problem areas. This cause-and-effect analysis is an invaluable resource for business owners.

Now, a few words on how to read this hummer. Between any two boxes - in the direction of the arrows - put in the the word "causes". In other words, "low cash" causes "high borrowing". Now, if you work against the arrows, include the words "is caused by" between the two boxes. For example, "high interest" is caused by "high borrowing".

Just a short word on gross margin: it's highlighted for a reason. Without an adequate margin - long term - you might as well hang it up. Not maintaining your margin is almost always an issue - direct or indirect - in terms of problems. It's like the big star on the state map; all towns are important - but some are more important than others.

Start at "low cash" and take it in all directions until you've traveled all through the system. It's a fascinating journey. Don't worry if you get strange glances as you sit there absent-mindedly talking yourself through it verbally. The key here is interdependence, and - when you think you've got it - try explaining it to someone else. Then you'll know you've got it for sure.

Keep in mind that this financial "skeleton" is rather general - it applies to any business. Your industry may not have some of the "parts", but don't feel cheated! Just as people come in all shapes and sizes, so do businesses. If some of these categories don't apply to you, simply leave them out. For instance, retail stores may not have accounts receivable. Okay, just leave out that part -- and be glad that you have one less area to worry about managing!

Many people visualize financial problems or issues as isolated occurrences. One of the primary benefits of this financial cause-and-effect diagram is, in fact, to highlight the interdependent nature of the financial system in your business. Remember, this diagram doesn't care how big your business is -- it works for the Gas-and-Go-Deli or for Chrysler.

Effective financial management falls somewhere between art and science. The goal is balance and control, combined with intuition and risk-taking -- and luck. I've always considered "luck" as the point at which opportunity and preparation intersect. To achieve -- and maintain balance and control requires a process. This process is cause-and-effect analysis.

Your challenge is simple and straightforward. Use this format to take a trip through your business. As with any trip, you can't reach your destination without a map, and that's what this framework is - a financial road map. You may find it generates more questions than answers, but that's good. You can't solve problems until you know what to ask and where to look!