As part of my feedback, I recommended that the family develop a succession plan to clarify who would assume the leadership mantle after the current CEO was no longer active in the business. I was concerned that the only child who was employed in the business might not be qualified to hold that position. Ironically, while this client's attention is riveted to his financial statements, his family is beginning to come apart at the seams. Let me explain how.
Family businesses are creatures of entrepreneurs.
As a result, many family businesses are unable to survive in spite of their success, giving rise to staggeringly high failure rates. These non-financial factors can be measured and used to highlight weak performance areas that deserve the same level of attention a family would provide if cash flow were declining, earnings per share were decreasing, or some other traditional financial measurement signaled cause for alarm. In one of their early articles in the Harvard Business Review, they note that traditional financial accounting measures can give misleading signals about whether a business has simply performed well in the past or is also positioned to perform well in the future. While traditional financial performance measures may have worked well in the industrial era, they are insufficient to measure many of the skills and competencies companies need to master today. Kaplan and Norton also explain that companies must learn not only how to invest in and manage physical assets but intangible assets, such as knowledge and information, as well.