We are all hearing much lately about the Fiscal Cliff. According to Investopedia (http://www.investopedia.com/terms/f/fiscalcliff.asp#ixzz2FbZsvKK6, the Fiscal Cliff is “a combination of expiring tax cuts and across-the-board government spending cuts scheduled to become effective Dec. 31, 2012. The idea behind the fiscal cliff was that if the federal government allowed these two events to proceed as planned, they would have a detrimental effect on an already shaky economy, perhaps sending it back into an official recession as it cut household incomes, increased unemployment rates and undermined consumer and invester confidence.”
Regardless of how these events turn out, business owners should always be focused on avoiding their own Fiscal Cliff. My definition for the Fiscal Cliff of a company are events leading to a drastic reduction in the value of the business that can cost the owners significant decreases in their personal wealth and the well being of those they employ. What can business owners do to avoid their own Fiscal Cliff?
In a book called Manage To Sell Your Business by Robert Scarlata, he discusses what private equity groups do (to grow the value of the businesses they acquire) that most business owners do not do. Below are just three of the things PEG’s do that business owners should be doing if they not only want to avoid a Fiscal Cliff, but instead significantly increase the value of their business.
- Maintain up to date financial statements and performance metrics– I have personal experience with PEGs and I can assure owners that they are absolutely fanatical about having timely and accurate financial statements. Why? “If issues arise (and they always do), it’s critical to find out early to minimize harm and maximize opportunities (Scarlata, 2012, p.60).” PEGs also analyze performance metrics so there can be continual improvement. Scarlata calls it “a closed loop feedback system: Measure results. Suggest changes to improve results. Implement. Measure results. Repeat (Scarlata, 2012, p.60).”
- Prepare budgets– PEGs insist on preparing forecasts for a year and even beyond a year. They may even prepare several budgets with different assumptions to properly plan for the future as conditions change. I agree fully with Scarlata that “business owners are often so caught up in the day-to-day activities of running their businesses that they don’t look up, take their blinders off, and see what’s coming down the pike. They’re whacking through the weeds in the valley, giving no attention to the mountain that looms on the horizon (Scarlata, 2012, p.61).”
- Cost Analysis– PEGs rigorously perform cost and profit analysis of a company’s products and services. Only then can they know which products and services to either drop or improve efficiency that can dramatically increase profits.
Business owners can greatly improve their chances of avoiding their own Fiscal Cliff by giving strict attention to the steps above.
*Scarlata, Robert W., (2012), Manage To Sell Your Business