In my recent book, “Understandable Solutions, Confessions of a Forensic Financialist” I introduced a business assessment methodology called the REARview Mirror (“RVM”). My aim was to develop a simple tool that can be used by both business and non-business professionals. The concept is simple: know your past performance or occurrences, understand why things happened the way they did, change what you need to, and prepare for a different future outcome.
R: Review, E: Examine, A: Adjust, and R: Revise
We are now approaching the end of 2020, thank goodness!! A New Year’s holiday will have never meant so much!! We need to prepare for a better 2021. How? Use the RVM to conduct your assessment. Let’s walk through the steps.
Step 1: Review your business’ current status based on your past financial performance. As a business owner, first take a look at your Income Statement and Cash Balance. You need to know how much cash you currently have and how you came to that current balance.
When looking at your Income Statement, review both sides of the equation; Revenues and Expenses. Know your profitability. Are you where you thought you would be? Probably not, it has been a tough year for most. Once you understand your current financial situation based on reviewing your Income Statement and Cash balance, go to Step 2, Examine. This step will begin to answer some critical questions.
Step 2: Examine the details. Now you can dive into the detail. You need to answer the “why” questions.
- Why did you realize your current level of profitability?
- Why is your current cash balance where it is?
This will take some digging, but fear not, you are not alone in this endeavor! If you need some assistance, reach out to a business coach. If you do not need help, great, but go through the exercise. The cost of not performing a thorough examination of your current financial state can cost you your business!
Let’s walk through a quick example. You find out in Step 1, the Review, that your profitability is 10% less than expected. Additionally, your cash balance is $25,000, which is also about 10% less that your desired level. Now what?
For assessing profitability, look at both Revenues and Expenses and try to answer the following questions:
- Did you meet your sales goals? If not, why not.
- Were there any major expenses that you paid for during the past year? This would certainly decrease your profitability.
- Were there any typical expenses, such as rent, utilities, or inventory/supply that were greater than expected?
This is just an example of some areas to examine and by no means an exhaustive list. But this will get you started and should begin to uncover some of the reasons for your current financial state.
Step 3: Adjust. Based on what you learned in Step 2, the Examination step, you should know what needs to be adjusted. For example, if you learned in Step 2 that sales were not what you expected and, therefore, you did not meet your profitability goals, then you know some revenue adjustment is necessary. What does this mean? It could mean any of the following:
- Adjust your marketing strategy and tactics. Perhaps you are missing your target audience.
- Adjust pricing. This might be the right time to provide some volume discounts or one-time sales discounts.
- Investigate further into the sales efforts of your business. Are there any sales associates who have fallen short of expectations? If so, why? Has the pandemic changed how you sell? Are prepared to follow through with some of the changes needed with you selling efforts?
Once you know what needs to be adjusted, you can better plan for the next fiscal period. Meaning, you can implement the necessary adjustments based on the needs you discovered in Step 2.
Step 4: Revise. This is the step that incorporates a different view of future expectations. Once you have made adjustments, then you need to see what those adjustments mean to your business and to your overall financial projections. The whole idea of the RVM is to plan for better future outcomes. This can only happen by revising projections based directly on the adjustments you made. No guessing here. The revisions you intend to realize will impact what you review in the next cycle. That said, this requires careful thought. Do not rush through this step because it will greatly influence the efficiency and productivity of your next RVM cycle.
The power of the RVM is in its simplicity. In this short blog post, a financial RVM cycle was presented, however, the RVM can be applied to almost any area of your business, as well as many personal situations. Review, Examine, Adjust, and Revise are simple and straightforward steps, flexible enough to use across multiple disciplines, but structured enough to provide the necessary information needed to a successful future.
Apply the RVM to your own business or situation. You will find it to be an extremely useful tool that should be on the top of your toolbox. For more information on the RVM and business coaching, contact email@example.com and check out more on understandablesolutions.com.