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Archive for June, 2011

What did your accounting tell you today?

Sometimes business owners are guilty of over examining accounting records, looking for the answer. Developing a list of key performance indicators (KPI’s) is better, but can still be overdone. Usually five is enough. The importance of measuring to improve gets confusing when you don’t know what you should be measuring.

Instead of trying to answer every possible question or problem in your organization, try breaking this down into a few straightforward questions, with straightforward answers. This evening I went to a Mexican restaurant. Facing me as I entered the building was a whiteboard listing the specials tonight.

At first it didn’t strike me as that interesting. After all, what Mexican restaurant doesn’t have a list of specials? What I did find interesting however was this booklet that was used by the waiters to track how many of each special that was sold. A simple problem (which specials sells the best on Wednesday night), answered with a simple tracking system (spiral bound notebook).

Once I worked with a child care center that had a problem with teachers showing up for their shift 5-15 minutes late. It was a big problem because the state mandated a specific child to teacher ratio. If kids showed up early, or even on time and the teachers were late, fines were imposed. I recommended tracking teacher tardiness on a simple spreadsheet and then posting the weekly results above the time clock for everyone to see. Within two weeks everyone was showing up on time. Nobody wanted to be the offender.

Don’t get too bogged down with esoteric measurement systems. Consider some easily solvable problems and conquer those first.

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Using QuickBooks accounting to your disadvantage

As recently as 15 years ago most small business owners relied on an outside accounting firm to manage their accounting tasks and payroll services. For the most part, this privilege was abused by accountants. Although the reams of financial data sent back to the business was accurate, it was mostly useless information.

Along came QuickBooks and the accounting rug was pulled out from under many accounting firms. Finally the small business owner was empowered to take control of his or her bookkeeping and accounting. Unfortunately most small business owners lack the understanding (and time) required to achieve accurate accounting records, and equally importantly, they lack the ability to interpret the results in any meaningful way. Granted, with QuickBooks you can push a button and find out if you made or lost money last month, but this becomes irrelevant if the underlying data is incomplete. Furthermore, profitability is but one financial measure that provides a very narrow view of how the business is actually performing. As I’ve stated before, 9 out of 10 QuickBooks data files I examine have mistakes that are misleading the business owners. This problem is even more pervasive with other, less understood accounting software.

Small business owners need to start give back some of the accounting responsibility to qualified accountants. In house bookkeeping is fine, but someone who knows what they’re doing, and who genuinely cares about the business needs to examine, correct, and provide a useful opinion about the accounting data. Accountants in general need to step up and start taking more ownership of their clients businesses. I am often appalled at how CPA’s and other accounting professionals service their clients. Sadly, most small business owners can’t tell the difference between good and bad work. Only after an obvious mistake is discovered, does an accounting client decide to get a second opinion.

In big business the problem is often labeled as “accounting irregularities”. With small business it just called sloppiness. Call it whatever you want, if you own a small business, you deserve and should demand that you get accurate and timely financial results. Too many small businesses have been handicapped over time, or have gone out of business because nobody was looking out for best interests of that business owner.

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Accounting for charitable giving in business

I read a bible verse from Nahum 3:16 this morning, where Nahum judged the business people of Nineveh for exploiting resources with no intent to replenish what they used. Interestingly enough, I’ve know clients that exploit their employees, vendors and customers. Thankfully these companies don’t last forever. I’ve also run into a few clients that actively give back as a normal practice of their business.

One professional service client set up a scholarship fund to his alma mater, and quietly donates money to his church, as well as individuals in desperate need. A retail business I work with donates there facility to nonprofit organizations so that they can hold fundraising events. Finally, a contractor I work with pays his staff to assembly community gardens and pick up litter.

From an accounting perspective it’s had for me to draw a direct line from these examples of charitable giving, over to an amazing bottom line (profit), but I have to admit that each one of these businesses is doing very well indeed. I should also point out that they didn’t wait until they were successful to begin giving money or time to their community. It was part of their business from day one.

I’m certain that generosity, combined with the correct frame of mind, will be rewarding. In other words, if you’re going to give, you need to do so because you want to give and because it makes you feel great.

Sadly these giving organizations are the exception to my client base, and small businesses in general. Do you have a serious plan for giving back within your business? If so, please tell me what you do, and how you’ve been rewarded in the comments section.

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7 traits of a successful business

As I’m just wrapping up a whirlwind series of meetings with clients in Milwaukee and Madison Wisconsin, I was struck by the impressive, albeit steady successes these accounting clients are all enjoying. I couldn’t pick a more mixed bag of industries, including specialty retail, B to B service, IT support, supplier to the construction industry, and so on. It doesn’t matter what type of business you own. As evidenced by my list of clients, there is someone in your industry that has the discipline to get it right and they are enjoying sales growth, profit, or both.

I thought it would be a good idea to list what they all have in common. Hopefully you will consider some of these points to help improve your business. Here is a brief list of my opinion of what they’re all doing right.

  1. Every one of these businesses is aggressively pursuing new markets. They are not dissuaded by the bad economic news we hear every day.
  2. Tied very closely to point number one is that they all are exceedingly patient. They are not chasing any new business just to get the sale. They are accountable to a business plan, and don’t seem to have any problem turning down new business if it doesn’t fit their model.
  3. They are all hiring, but cautiously.
  4. Interestingly, their marketing spending is much smaller than their industry average. They rely on pleasing their current customer base.
  5. Hard work, long hours. They put in more time than most small business owners I know. They are tired and energized at the same time. Not stressed.
  6. None of them have significant debt, and all of them have significant money in the bank. As I’ve examined their accounting records and prodded them to bolster their balance sheets, their confidences (and options) have grown. Wouldn’t having tens of thousands in your savings account give you confidence?
  7. We have worked hard to develop reliable KPI’s or financial metrics, unique to their business, so that at a glance we understand what’s really going on in their business. In other words, they care, but don’t obsess over financial results.
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The most overlooked accounting measurement

One of the least understood financial measures, at least by the business owners I work with, is their working capital requirement. When examining accounting records, it is simply the business recievables plus inventory, subtracted from payables and payroll liabilities (with some minor exceptions). It’s called working capital requirement because many businesses are required to use internal money to support this spread. In other words, money is tied up waiting for customers to pay up(receivables), and also tied up in inventory. This is subtracted from the fact that you owe your vendors money, which effectively becomes your bank.

In some rare cases, such as some retail businesses, working capital is a negative number. This means that the working capital cycle produces cash; products are sold to customers before they’re paid for. Several years ago Home Depot insisted that all vendors get paid when the product is rung up at the cash register. This brilliant move essentially removed all inventory from the operation, giving Home Depot a tremendous advantage.

How you finance this lack (or difference) in cash is debatable, but knowing and tracking your working capital requirement is important because it can help resolve cash flow issues. Like many topics related to small business financial excellence, it goes back to a decent accounting system and an eye for details.

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Profit from loyal customer 5 ways

Never confuse a loyal customer with a satisfied one. A satisfied customer can be fickle in their motivation and desire, while a loyal customer will be your strongest advocate. A satisfied customer will leave your business for a better deal at your competitor, or when you make a mistake. A loyal customer will forgive mistakes and will be more effective than the best marketing campaign you could design.

There are five ways you will profit handsomely from a loyal customer. Watch your accounting balance sheet become stronger every month when your focus in on loyalty.

  1. Base profit – That is, from every product or service you sell. With a good bookkeeping system, you should know how you compare to your industry peers.
  2. Increase frequency of purchases – Loyal customers will buy more from you over time. Do you know what your average sales per customer are each month?
  3. Reduced costs – A loyal customer doesn’t need their hand held when they enter your business; they already get how you operate.
  4. Referrals – Probably the hardest thing to account for, but also the most powerful. Loyal customers will tell their friends and family how delighted you’ve made them.
  5. Price Premium – Loyal customers won’t shop around and appreciate the value proposition you’ve designed into your product/service. Because of that, you can (and should) charge a premium for it.

Now just compare this with the idea of offering a coupon, Groupon, or other discount. It becomes completely unnecessary.

There is a simple measure you need to use, to determine just how many of your customers are loyal. If you’d like a copy, please send me an email and I’ll forward a copy of the survey question(s).

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Accounting for 2 reasons why Groupon is bad for business

There are actually four reasons why discount programs are a lousy way to attract loyal customers. Examples of discount programs include things like frequent flyer miles, coffee punch cards, and yes, Groupon. They’re all marketed under the guise of being a customer loyalty program, but the reality is that they usually breed a group of fickle customers that will flee to another provider, as soon as a better deal is offered. Of the four reasons these discount (loyalty) programs don’t work, Groupon happens to qualify in two of those categories.

  1. Watered-down effect: If you’ve ever tried cashing in frequent flyer miles, you know what I mean. According to Webflyer, there continues to be a widening gap between the number of miles awarded by airlines, and the number of miles redeemed (down to 7.5%).
  2. Lack of incentive: Too many programs are designed to make it impossible to see any benefit whatsoever, in the short term.
  3. Economic Trap: Groupon falls into this category. According to a study done by Rice University, about half the businesses participating in daily deal programs like Groupon, lose money. Which begs the question, why bother? Is sudden exposure to new customers worth losing money over?
  4. Your not learning anything about your new customer: Ok, granted this isn’t unique to Groupon, but I was reminded of this problem when I redeemed Groupon deal at our local steakhouse. When I quizzed the owner on how he was measuring the redemption rate, average ticket price of meals, or return rate of new customers, he just shrugged his shoulders.

If you want to understand the five ways truly loyal customers will increase your profits, check back soon for my next blog post.

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Accounting reports won’t tell you this about your business

Despite everything you’ve been taught in business school, or the school of hard knocks about business success, there is one thing that all customers will pick up on and keep them coming back for more. That is, complete and unbridled enthusiasm for whatever it is you do. I’m not talking about simply liking what you do. Rather, the product or service consumes you and everyone around you. Two quick examples:

Some friends and I went out for dinner one Friday night in Wisconsin, and ended up at a tiny country tavern. The owner was a second generation butcher and was well known for his sausages. As we waited for our meals, he came around with slices of different bratwurst he recently made, explaining the different ingredients. He was absolutely giddy about the whole process. Small business, probably an accounting nightmare, but Tom, the owner of Schwai’s Meat was completely enthusiastic, and I’m still writing about the experience 10 years later. By the way, he now owns three locations!

Second example: I sat in on a lecture about wildflower prairie restoration. The owner of the business, Neil Diboll, owner of Prairie Nursery talked about his earlier, somewhat leaner years when, for entertainment he would spend evenings sitting out in the middle of a prairie trying to pet bumble bees (apparently they become quite docile when the day cools off). Nuts? Yes! But today Neil owns what is arguably the largest purveyor of wildflower and prairie grass seeds in North America.

You have to love what you do first, the money will follow, which is a distant second. Heck, even if the money never follows, I think you’d have a richer life doing what you love to do, rather than what seems like a good business opportunity.

This post has very little to do with QuickBooks, accounting or bookkeeping; I understand that. But it has everything to do with entrepreneurial success. Ask yourself one simple question, what do you spend most of your time working on? Do you enjoy every minute of it?

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Ignore this accounting measure at your own peril

Yesterday I wrote about the importance of financial discipline, when it comes to your debt to equity ratio, using IBM as the example. It occurred to me this morning that as I examine accounting records of my business clients, both in and out of QuickBooks, there is another accounting measure that almost always needs improvement, and goes hand in hand with debt to equity. That is, your current ratio.

Current ratio is an accounting measure that compares your current assets to your current liabilities. Put simply, it’s a comparison of your bank account balances, added to your accounts receivable, along with the value of your inventory, compared to how much you owe in credit card debt, payroll taxes, bills to vendors and your line of credit. Ideally you should have two dollars of assets to one dollar of liability, which would be expressed as a current ratio of 2.

This measure is very important, considering the uncertainty of the economy, for two reasons. First, banks are scrutinizing this accounting ratio. I had lunch with a loan officer from a Raleigh bank a few months ago, and asked him what his loan committee considers important when deciding for or against a business loan request. He told me that applicants need to have a running history of current assets, above their industry peers. Your ability to “live within your means” in terms of money you owe to others (accounts payable), while having a healthy balance in your checking or savings account, is what’s being judged.

The second reason you need to improve upon your current ratio is precisely because of the economy we’re in. It’s like the old adage says, “whoever has the gold, makes the rules”. Before I even examine a QuickBooks file of a new client, I can usually tell by their level of confidence that they’ve got money in the bank. Almost everything is on sale in this economy and if you have money, you can move your business forward on the cheap.

If you have a negative current ratio (owe more money than you have in assets), or if the ratio is less than one to one, you should consider the simple savings advice I wrote about a couple of weeks ago, HERE. There are few things that will build your confidence more than accounting for a solid current ratio. If you managed to improve upon this, comment below and tell me how you did it.

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Accounting discipline leads to business longevity

The cover story in the business section of USA Today is about how IBM has managed to survive and thrive as an ongoing business entity for 100 years; a rare feat indeed. Two attributes jump out of this story. The first is constant product and service innovation, something I’ve discussed in my new video series. The other is the fact that they’ve remained financial conservative. If you’ve read my blog for any length of time, you’d realize that this is another accounting tenet I embrace.

So what does it mean to be fiscally conservative? Well for starters, you should not take on excessive debt, in good time or bad. In IBM’s case, they carry about 95 cents of long term debt for every $1 invested by the shareholders. Put into small business terms, you would hold a dollar of long term debt, for every dollar of equity. Check out your balance sheet and tell me what it reveals.

If you’re like many small business owners I help manage accounting and business finances for, you’ll probably have a 3 to 1 ratio of debt to equity. In several cases I see negative equity. Although these kinds of businesses are ongoing, they are technically insolvent. Sort of like living in your house even though you’re upside down with your mortgage. Interestingly enough, banks have historically ignored this fact, until recently. Now, the equity section of your balance sheet has come under great scrutiny, with good reason. Think about it, you could take out a long term loan for $5000, then pull out $3000 as a shareholder distribution (i.e. to pay yourself), causing a distortion of this accounting measure.

If your debt to equity measure is less conservative than you’d like, how do you correct it? Two ways: either inject more of your own money into the business, or take less of the profit out. How do you take less profit out? Give me a call.

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