I consider what I term The Reality Principle to be of supreme importance for any business that desires to achieve its goals. Actually, I believe that any business that does not embrace this principle risks its very survival during these uncertain economic times. You may have heard of this principle being a concept developed by Sigmund Freud. His concept is not what I mean by The Reality Principle. Allow me to describe what I mean by this principle.
The Reality Principle is simply facing reality and then reacting appropriately. In the words of Jack Welch, ‘face reality as it is, not as it was or as you wish it to be” (brainyquote.com).
I have begun work with some business owners who simply did not know the reality of the financial condition of their company at certain points in time. They were operating their company on a gut feel or instinct. There are all sorts of consequences of operating a business on feel; for example, failure of the company, in spite of the fact that the business owner “felt” everything was fine. Another consequence that I have seen to a business owner not facing reality is a loss of peace of mind. This is a sad way to live that simply results from a lack of knowledge.
I want to plead with you as a business owner to constantly face reality about the financial condition of your company. Set performance standards and then measure progress weekly, monthly, quarterly, and yearly. You will know the financial condition of your company at any point in time. The Reality Principle sets your company on the right path to success, and consequently, peace of mind. Let me encourage you to start by knowing the reality of the following:
- Cash balance
- Accounts Receivable balance and customers past due
- Accounts Payable balance and vendors past due
- Working Capital
- Net Profit/Loss for the last month, quarter, and year
- Operating cash flow
- Most profitable customers and why
- Most profitable lines of business and why
- Least profitable customers and why
- Least profitable lines of business and why