As we head into spring with optimism that the economic forecast will project better conditions, now is the time for businesses to study year-end financials, take stock of the operation and “clean up” in preparation for a strong spring rebound.
“Even if year-end numbers are preliminary, you have the information you need to evaluate your people, customers, inventory, every aspect of the business,” says Craig Johnson, president and CEO, Franklin Bank, Southfield, Mich.
Actually, cleaning house — not sweeping the operation of its critical resources but, rather, tidying up some of the messy areas — is a healthy exercise for business owners year-round. Efficient, profitable companies don’t wait until tough times for a house inspection.
“We use the term ‘spring cleaning,’ but it would be a mistake to only evaluate your business once each year,” Johnson says.
Smart Business asked Johnson how to give a business a thorough inspection.
What indicators should business owners study before doing any ‘spring cleaning’?
At this point, you should have year-end numbers in hand or at least solid preliminary numbers you can use to gauge last year’s financial performance. Compare those numbers to years past. Look at individual line items, but take in the big picture. Do not make a big decision to wipe out an area of your business based on one month of poor performance. However, do consider what variables might have caused the rut. Ask yourself these questions: What customers are the most profitable? What inventory moves the fastest, and what sells at the highest profit margin? Which employees are top performers? Next, consider what baggage might be dragging down your business in all of these categories. That is where you will concentrate your ‘cleaning’ efforts.
How should customers be evaluated?
Review your customer list and note which customers purchased products or services from you last year. Chart the profitability of your customers. If you are in the retail business, analyze your inventory and note what product lines sold the best. Now, evaluate your customers based on their purchase habits and what they contribute to your bottom line. Say you have a handful of customers that purchase highly profitable products. What type of customers are these? Profile these customers and develop a strategy to attract more clients like them.
On the other hand, make a list of customers that buy a high volume of products or services that realize very low profit margins. Can you feasibly sell different services to these customers or charge more so you earn better profit margins? If not, consider whether these customers are healthy for your business. Could you reallocate the time you spend servicing these clients to prospecting better customers? These are not easy questions to answer. Spend some time deciding what type of customer your business needs to be successful.
What measures should businesses take to ‘find’ cash in the warehouse?
Evaluate what inventory moved quickly last year and what items are stagnant what’s still sitting on the shelves, slow-moving or obsolete. In this economic environment, cash is critical, and you can’t afford to have dollars tied up in inventory that’s sitting on the shelf. Rather than maintaining inventory that isn’t selling, discount and sell it — blow it out of your warehouse and turn it into cash, understanding you’ll take a loss. Even so, you can reinvest that cash into more profitable areas of your business. Inventory is extremely expensive to keep on hand if it isn’t selling quickly and earning your business at least reasonable profits.
What approach should business owners take when evaluating employees?
As you analyze year-end numbers, refer to your 2009 goals and beyond. Review your budget and business plan and decide what human capital is critical to execute your vision. By now, you have conducted year-end employee performance reviews. If there are people on staff that do not display the flexible, hardworking mentality your company needs to drive forward, now may be the time to cut loose workers who are dragging down the company’s potential. Take your time when making this difficult decision.
What other housekeeping items should business owners tend to as they prepare for a new season?
Now is a great time to sit down with your banker and review year-end financial statements. Get a feel for the direction your bank is heading in regard to lending. If you feel like your business is not on the same page — perhaps you’re on the cusp of a growth spurt that will require capital, and the bank is not signing deals with anyone right now — then shop the relationship. Do not allow media or doom-and-gloom reports to convince you that banks are not lending — they are. You want to partner with a financial institution that is prepared to ‘start fresh’ this spring right along with you.
CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at CLJohnson@franklinbank.com or (248) 358-6459.