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Kenneth Keller: Making your balance sheet stronger

Inside Business

Posted: April 7, 2009 11:52 p.m.
Updated: April 8, 2009 4:30 a.m.
 
Those who have passed Accounting 101 understand that business owners should focus on building the net worth of their business by adding to their asset base while reducing liabilities. The difference is owner’s equity, the value of the business.

When U.S. society was an industrial one, it was easy to see machines, equipment and inventory in a facility and get a quick answer to the question, “What is this business worth?”

Times change, manufacturing is declining and most businesses operating today are service businesses. The balance sheet for many is lighter because there simply are not enough hard assets on the books to build a large and positive balance sheet.

For service businesses, “goodwill” is the catch-all category where the true value of the entity is found. No one who actually owns a business is exactly sure what the concept of goodwill is or what it means from a practical standpoint. For the sake of argument, here is the definition from Wikipedia:

“Goodwill is an accounting term used to reflect the portion of the book value of a business entity not directly attributable to its assets and liabilities; it normally arises only in case of an acquisition. It reflects the ability of the entity to make a higher profit than would be derived from selling the tangible assets. Goodwill is considered an intangible asset.”

There are ways to build a balance sheet in a service business and increase revenue and sales (reported on the income statement) and witnessed by improved cash flow.

One important component of goodwill that could be used more often is that of creativity. More business opportunities would surface and nagging problems would be addressed, if brainpower was brought to bear. Too many owners are so busy being firefighters (an honorable profession but not the same as being the owner of a business) instead of being architects (planners and builders of businesses, not buildings).

Instead of tapping into the unused portion of the brain to answer the question, “How can I (fill in the blank),” the sight all too often seen is an owner-as-victim sobbing, “Why me?”

Can a value be put on creativity? What is the value of one good idea? In a world focused on the creation and implementation of ideas, a single idea could be worth millions of dollars. Spending time thinking, instead of crying, has the potential of an outstanding return on investment. Just ask those two young men who founded Google not so long ago.

A second component to enhancing goodwill will gain more revenue and improve cash flow. It is the building of new relationships.

Owners keep going back to the same clients, instead of finding new clients to replenish those that no longer buy. While it is true that the easiest sell is to a satisfied client, at some point most clients will end the relationship.   

Harvey MacKay wrote a terrific book entitled, “Dig Your Well Before You’re Thirsty,” which discusses something every owner should be focused on all the time but isn’t. Why is that? The owner is too comfortable and mesmerized watching the current well going dry.

The existing well goes dry because clients no longer have the need. They have moved on physically or they have found some other way to have their wants and needs satisfied. But it is easier, cheaper and more comfortable to watch and complain about the well going dry than it is to dig a new one.

The third component that could build goodwill is the improving the business model. The question that must be asked is a simple one, “How can I make money when I am sleeping?”

Research suggests successful owners think about this question constantly. They obsess over it. They look at competitors and other industries to learn and leverage from what is already being done. Then they tweak it to fit their own needs.

These are challenging times for many owners and the natural tendency is to hunker down and ride out these tough times and wait for the good times to return.

In the end, the owner is solely responsible for the creation of good times for his or her own company, regardless of what is taking place in the economy.  

Kenneth Keller is president of Renaissance Executive Forums, which brings business owners together in facilitated peer advisory boards. His column represents his own views and not necessarily those of The Signal.

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