Uncovering Hidden Business Dangers

Everything is going great and the future looks good. Then, everything turns South, apparently without warning. But was it without warning? The following items are some of the areas where danger may lurk, undetected until too late.

Historical Financial Statements

Financial statements show past results and not the future (or even the present). They reflect the momentum of previous decisions and cannot be viewed in isolation without consideration of inter-period changes and why the change is taking place. Financial reports also do not reflect information that may not have been known when the earlier decisions were made.

• To what extent have past assumptions changed?
• What are the potential impacts in the future?
• What adjustments should be made when making decisions today?

Remember: financial accounting is different from managerial accounting. Financial accounting's objective is to record past actions within GAAP (Generally Accepted Accounting Procedures). Managerial accounting converts company data to a form needed for current decision making. If you use outside accounting or auditing services you will likely be getting only "financial" accounting when you need both.

Reorganizations

Changing assignments will not correct problems unless the underlying issues are adequately identified and fully addressed. Chastising or changing names on the organization chart will only shift the blame during the next review.

• Do you have valid reasons for why personnel changes were made?
• Are only the surface issues being addressed?
• What actions are needed to support the organizational change?

Remember: activity does not necessarily mean resolution.

Ignornance is Bliss

Not knowing about a problem does not mean it doesn't exist. Ignoring issues until they become obvious in the financial statements will mean that the problem has grown to full maturity and will likely be reproducing additional "little problems" as the organization tries to cope..

• What systems are in place to identify the little things before they take root?
• Who in the organization has responsibility for issue identification? You alone?

Remember: when everything is looking the best, that is the time to pause and search for hidden problems. Congratulations may be premature.

Personality orientation

Being "people oriented" does not mean that you can't look past the person and concentrate on the situation. Concentrating on personality is often a problem in small companies where employees are relatives that may be handling business functions based on their availability, not because of knowledge or experience. But this personality orientation is not limited to family businesses.

• What criteria are used when making assignments?
• Are there differences between the way different people are evaluated?
• To what extent is the "personality" contributing to the situation?
• What approach is taken toward problem identification and resolution?

Remember: wearing rose colored glasses does not make the world rose colored.

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Last modified: December 17, 2005