Dream Killers

A few years ago I showed up at one of my grandson’s T-ball little league game. Since, the game was already underway when I sat down in the bleachers I asked one of the moms sitting next to me what the score was. She acted somewhat surprised at my ignorance about life as it relates to little league and proudly informed me that “We don’t keep score. This is about the kids having fun and getting familiar with how the game is played”. I took a deep breath knowing my tendency to make my feelings known in a way that many consider blunt. Then I could not contain my desire to express that I thought that was just plain stupid. I asked her if she honestly believed that there was any doubt by any of the kids playing the game or any of the coaches about which team was winning. In all human endeavors there are winners and losers. Yes, there are ties, but the overall desire is always to win. Nobody starts a business to breakeven over the long-term and losing is not a viable alternative. Over many years I’ve read and studied how to measure business activity and have found that the concept and reasons for measuring business activity is no different than keeping score for any other activity, even little league. There are countless measurements that have been used to evaluate and manage businesses. Lenders, investors, and management regularly use the historical financial statements and various ratios to chart progress and compare to other companies. The finest colleges and universities include ratio analysis and other analytical procedures in their business and finance courses and there are entire publications, such as RMA Statement Studies, that report on various measurements of businesses broken down by sales, assets, and standard industrial classification codes. As a certified valuation analyst (CVA) I have used numerous database reports and studies that present common size ratios and other financial measurements in preparing a report on the fair market value of a closely-held business. You can go to the business section of any bookstore and find dozens of books that, in one way or another, present business management strategies using ratio analysis and other statistical measurements. You would think with all the emphasis placed upon the scorekeeping of business performance by everyone from the banker to the IRS that the closely-held business manager would at least show some curiosity about measurements of business performance. Well, nothing could be further from the truth. In my entire career working with hundreds of small businesses and their owner/managers I cannot recall any asking about their liquidity ratios or any measurements other than the basic amounts and percentages shown on their financial statements. Of course there are two numbers that every small business manager uses to measure the degree of financial success, sales and net income. There is a general opinion that increasing sales is the primary objective and any profit is a good thing. The failure rate for small businesses strongly suggests that to be effective as a management tool, the sales and profit required must be known and management’s performance judged relative to achieving the required results. I can identify two possible reasons why most closely-held business management devotes little or no time to understanding the traditional measurements mentioned above. Either they don’t know about them. Or they are aware but see measurement as keeping score and rating their performance. After all accepting personal responsibility, which was once expected adult behavior by American society, is now considered a rarity and somewhat odd. The new standard appears to be blaming any negative on something or someone other than yourself and take full credit for any positive. Just like the T-ball kids, if there is no scorekeeping there can’t be a loser or responsibility assigned for success or failure. This makes no more sense in the game of small business than it does in the T-ball games. Everyone will eventually figure out the score. In the chapter on Business Knowledge the difference between being stupid and ignorant was discussed. When management doesn’t know about the key measurements and how they can be used as powerful tools for improving the chances for success they can blame ignorance. If they decide not to use them once they are aware of them they are either trying to avoid being held accountable or fit the definition of being stupid. In as much as I have rarely (actually never) concluded an entrepreneur to be generally stupid, I believe that there is a lot of ignorance about measuring as a key tool available to management.