Blue sky thinking but knowing your numbers

Blue Sky by Ute Wieczorek-KingA guest post from Fiona McKenzie at Blue Note Solutions Ltd:  

A while ago I was at a business networking meeting when one of the business owners said: “I’ve been trading for two years but I don’t know if I’ve made a profit. I’d rather not know.”

Well after I’d got back on my chair (eek – the tax authorities?) I realised that this statement was perhaps an extreme example of a phenomenon I’ve often experienced in business. This woman’s business was her passion, her baby, and she didn’t want to be told it was not a success. She wanted to keep on going regardless.

This attitude is not confined to small start-up businesses. Anyone who has worked at a senior level in finance will recognise that sometimes business decisions are based on criteria other than cold, hard business analysis and logic. Basically a decision is reached and then the search is on for facts to support that decision.

However, especially for smaller organisations profits are essential to enable business survival. If, over the longer term, your revenues do not exceed costs i.e. you have a profit, then you are paying your customers. That is not a business but a hobby. This is not to say that if a business does not immediately make a profit it should cease.

Most new businesses take time to develop. Amazon famously did not make a profit for seven years. Some investors criticised it for that ‘failure’. But it was part of the business plan to expand and expect the profits to accrue later.

There is a place for hunches or feelings about future trends. Twenty years ago if I had been asked to model the mobile phone market I would have considered the demand limited and any business analysis would have been pessimistic. Often the best ideas are so simple the impulse would be to assume they can’t be viable.

Remember Friends Reunited?  Launched in 2000 by a husband and wife team it was sold five years later for £120 million. Analysis would not have predicted these successes. However lack of information and planning, for example about costs of working capital, could have sunk these business successes before they got started.

All business carries risk.

However plunging in blind or with false assumptions can only waste precious time and resources. Business needs to have the facts and figures in order to make informed choices. Those choices will always be a matter of judgement but ‘what is measured can be managed’. It is a better policy to measure what is actually happening and then to model possible future scenarios.

The future is uncertain but informed risk is better than ignorance or basing decisions on biased analyses.
About the author: Fiona McKenzie is the Director of Blue Note Solutions Ltd based in Oxford. Fiona helps SMEs gain clarity and control of their financial performance. She offers a complimentary Profit Improvement Review to SMEs based around Oxford and the Thames Valley.

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