“I believe in looking reality straight in the eye and denying it.” – Garrison Keillor
Your business is growing at a good rate. Every year, you boost it forward by creating one or several new product lines or divisions. One of these products becomes a favorite of yours. You like it so much, you want it to work — you want it to be massively successful.
There are little bits of evidence that your pet project is not as good as you want to believe, but you ignore them. When someone criticizes it, you feel defensive. If you get marketing or financial reports that look bad, you insist that they are flawed and ask to have them refigured. If the reports come back looking good, you are happy.
Love is blind — but you don’t want to turn a blind eye to your business.
In my client’s case, there were warning signs …
* There wasn’t a clearly established market for the division’s products.
* The small market that existed didn’t seem to be growing.
* There wasn’t a single strong frontrunner doing what he wanted to do.
Any one of these conditions should have called for a serious look at the numbers. But my client didn’t want to look. He wanted to believe. For four years running, he accepted the superficial and seriously flawed reports of the project’s manager — a guy whose vested interest was in making these reports look as good as possible. The reports looked good but there was no money in the bank. And every year, the new venture needed to borrow money. “How could I have been so foolish?” my client asked.
(By the way … in case you are wondering … I did warn him that things didn’t smell right to me. But I wasn’t involved in the business itself so I couldn’t take a critical look at the numbers. Still, I feel very badly for him. And I wonder if I should have protested more loudly.)
There is only one way to make sure something like this never happens to you: Devote some time each month (or year) to critically investigating the numbers. Don’t accept glib answers or superficial explanations. If something doesn’t make perfect sense to you, keep asking questions till you get a satisfactory answer.
A second thing you can do: Keep tabs on the cash. Know how much cash you have on a daily basis — and this applies even if your business is a large one. Third, make sure you have an accurate idea of accounts payable and other balance-sheet items that might not appear on your profit statements.
And, finally — keep plugged into the sales and marketing activity of the business. When this is profitable, everything else can be fixed. But when it starts to fall apart, your business is in danger — no matter what the reports say.