Accounting for customer value

If you own a retail business, there are a few financial measurements you need to keep a close eye on. They are the average basket, frequency of customer visits, and gross margin. Ok, granted there are actually several other accounting measures you should also watch, but these are the important ones because it translates into a quantifiable value of your customers. This value can then be established as a benchmark to be improved upon.

When I consult with retail clients about cash flow issues, I like to use a simple but powerful analysis tool to help illustrate how improving one or all of these three measures in varying degrees, will have a profound impact on gross profit.

For instance, a business with $500,000 in sales that improves the average basket price by $2.50, can add $8,333 to gross profit, based on a few other assumptions. Likewise, increasing the average customer visits by 1.5 visits could improve gross margin by $43,000, again based on a few other assumptions.

Making appropriate changes to a retail operation, whether it’s a newly started business or an established one, to improve gross profit, should be a focused effort. This is not a measure easily found or created within QuickBooks, Peachtree, or any other accounting system. If you’d like me to email a copy of the spreadsheet for FREE, please send me your contact information on the right side of our home page.

How to start and run a business

Although this blog post has little to do with accounting, QuickBooks, Peachtree, or financial diagnosis, it has a lot to do with how to run an abundant business; this based on a couple decades of informal (and formal) observing of how entrepreneurs start and run their business.

It struck me a few weeks ago that a business will be managed as either an extension of some desired lifestyle, or as a means to an end. Let me explain the difference with a brief example.

I once knew a very talented (and rich) carpenter. He’s dead now, but how he ran his business continues to inspire me. He would work at least six days a week, he drove around in a rusty, late model station wagon, and had equally tattered clothes. His mantra was to “build it so it’ll last 100 years”. Being thorough at what he did doesn’t seem to describe him well enough. He was never in a hurry about anything, and always made certain his customers were happy. Often he’d engage them in long conversation at the end of a work day, lasting well into the evening. In his 50 years of carpentry he only missed one day of work, and that was because he cut off his finger tip the day before and had to deal with some blood poisoning.

Now contrast this old timer with another contractor I know. He used to install garage doors and openers. When he started his business, he spent more time thinking up a clever business name than he did working out a good business model. He started each day with a “high cholesterol feed” at his favorite diner. When he finally makes it out to the job site, it was often past 9am. He didn’t start any work until his travel mug was filled with coffee and he had put on his expensive work gloves. No point in building up calluses. He used to drive around in a new pickup truck with a fancy ladder rack and beautiful chrome rims. I always found him to be somewhat condescending to his customers, and as you can imagine, he eventually lost his business, blaming it on the recent economic downturn.

Although my example was about contractors, I’ve witnessed the same pattern with jewelry store owners, dentists, chiropractors, and auto mechanics. Most clients I work with happen to fall somewhere in between these two examples. How about you and your business?

My point is that when you start a business, you have a choice to run it as if you’re creating some sort of idealized lifestyle, or you can run it as an operation whose chief purpose is to make you money, thereby giving you the life and freedom you desire. Now I’m not suggesting that you live in poverty for the sake of being self employed. I am suggesting that you consider living well below your means with your business, and then have a goal (read: time and patience) of creating an abundant life for yourself. There is a subtle difference here.

I’ve witnessed too many entrepreneurs start a business and use that as an excuse to “live it up”, all the while getting deeper in debt. Their justification is that they need to dress for success, which extends to office furniture, a nice car and other trappings. Because they didn’t spend enough time developing a decent business model, they really don’t know when they’ll have sufficient business volume to repay all the accumulated debt.

Challenge yourself to run a humble yet remarkable business for 12 months, and let me know how you made out. I’ll be betting that you’re going to be less stressed and more abundant. For those of you already operating with frugality, please comment below about what it’s like.

5 Common QuickBooks mistakes

These are the five most common QuickBooks mistakes I find, when review a new client’s accounting records. Although they’re in no particular order, they are all important because each mistake can mislead the business owner in terms of profitability, debt levels or operational decision making.

1.       Instead of posting business credit card transactions in a credit card type account, the monthly charges, as taken from the credit card statement, are summarized by expense type (e.g. meals, gas, office supplies), and then entered as either a vendor bill or bank check. This makes it hard to audit for mistakes and hard to manage credit card due dates.

2.       True costs associated with performing a service or selling a product are listed as an (overhead) expense rather than as cost of goods sold (COGS). Although fixing this will not change the net profit, it will make the income tax return more accurate, and help diagnose operational issues such as breakeven point.

3.       Customer down payments are received as a temporary overpayment. This causes accounts receivable to become negative, which should never be. The remedy is to create a Customer Downpayment liability account, and post the payment there. When the actual invoice is created, this down payment is removed and posted against the invoice.

4.       Too many expense or income accounts. Technically this won’t lead to an inaccurate financial statement, but it will make it very hard to understand how well or poorly the business is doing. QuickBooks has excellent reporting capabilities, so simplify and condense your chart of accounts.

5.       Fixed assets and depreciation aren’t up to date or accurate. Every time you purchase an asset worth more than $500, or dispose of an asset, you should update the appropriate fixed asset account. If you just started a business, any equipment or furnishings you brought into the business should be listed as a fixed asset. Likewise, every year the depreciation listed on the business tax return should also be posted in QuickBooks. This will reduce the book value of the assets, keeping the balance sheet more honest.

Although these are five common accounting mistakes, there are many other little (and major) mistakes I find when examining a set of accounting records. I can’t stress enough how important it is to seek regular professional advice from a CPA or accountant, to make sure you’re on the right track. You work too hard in your business, not to have accurate financial feedback.

5 QuickBooks mistakes

Starting a business; an informal list of things to consider.

1. Don’t quit your day job. Wait until you’ve built enough business to support you full time, with full pay. This can easily take up to a year. Most new business owners are overly optimistic about how quickly business will grow.

   2.       Start with your passion. That should far and away be your greatest motivation. If you’re getting into a line of work because of the tremendous opportunity (e.g. my buddy is making a killing at this), you’re doing it for the wrong reason.

   3.       Don’t take on debt, become self-supporting. This is quite debatable, but too often I see a mind-set that assumes or expects the new business will be financed on credit cards, perhaps because they read about a successful entrepreneur that built her business that way. This is playing with fire, so learn to live frugally.

   4.       Expect long hours and lots of hard work. You’ve heard this before, but let me give a few example of how this really manifests itself:

   a.       New to the marketplace, you will need spend 3-4 times more time getting a new customer than if you were established, simply because you have no reputation.

   b.      Because you have no reputation, everyone will be testing you. Vendors may not expect you to be demanding, customers may not believe you’re as skilled as you say you are. You will need to be extremely detailed about every bit of your work (return calls immediately, confirm appointments, etc).

   c.       If you own a retail store, you will need to be the cleaning lady since you probably can’t afford one – extra hours. If you own a professional business, you’re the one that needs to return calls over your lunch break since you can’t afford a secretary… get the idea?

   5.       Learn to live in the present. You’re going to make mistakes or miss opportunities; get over it and don’t dwell in the past. You also need to concentrate on what’s in front of you right now, rather than thinking about how you’re going to open new markets and hire new employees. Do what your need to do today, perfectly.

   6.       Pay yourself as soon as you get sales. Too many new business owners will only pull money from the business when the cash flow can support it. This is both admirable and misguided at the same time. You need to reward yourself through a steady paycheck for two basic reasons. First, the business operation needs to accommodate for your payroll. Pulling money infrequently will make it difficult to predict cash flow. Secondly, you will have a bad day sooner or later. When the chips are down, you can at least console yourself in the fact that you got a paycheck. This doesn’t have to be a huge or even modest salary, just make it consistent and affordable.

Groupon should only be used this way

Too many small businesses have used Groupon like a drug, hoping that an injection of discounted sales will provide needed cash flow today; worrying about the ramifications of discounted sales later. All this of course is under the guise that exposing your business to hundreds of new customers will benefit the business in the long term, or that these Groupon users will decide to purchase more than what’s being discounted, thus raising your average purchase price. There are generally two kinds of business, and Groupon will only work for one of them.

The first business is one with high variable costs. These are expenses that are inextricably linked to making a sale; things like labor and inventory or product cost. In other words, to make a sale you must be either selling some product or performing a service with labor cost tied to that service. Examples would be a retail store, a massage therapist, a computer repair person. Open your accounting program and check your income statement. If you have considerably high Cost of Goods, or if your labor costs are a disproportionally large percentage of your sales, you fall into this group. For these kinds of businesses, Groupon is a bad idea. Your sales are so horribly discounted that you will never recover enough money to cover both the cost of the sale and your overhead expenses. Taking this one step further, don’t assume that these new customers will return, and that over time you’ll recover the cost of the discount. More often than not, a customer that uses Groupon or other coupons will only shop when there is a sale.

The second kind of business is one with very low variable costs, or no cost of goods; a bowling alley for example. Whether they have one or twenty customers, the doors will remain open and the lights will stay on. Adding more bowlers in this example simply helps cover the cost of fixed overhead. There is a point however where it will become a determent, and that’s when the business needs to add more staff, or the new (discounted) customers begin to displace full price, regular loyal customers. An example of this is when a golf course fills all available Saturday slots with Groupon customers, rather than the regular full-paying golfers.

My fear is that too many businesses are agreeing to use Groupon, or any other discounting marketing strategy, without working through the accounting first to determine the real cost/benefit. Rather than doing the hard work to build a truly loyal customer, they are using this as a crutch to help their business survive another month.

Check your checking

I’m often surprised at how often mistakes are made on checkbook and credit card statements. Interestingly enough, even the most careful business owners will miss these hidden errors, costing them a lot of money every year.

It seems that the mistakes boil down to a few common themes:

1. Fraud – The waitress received a tip of $4.00 but changed it to $8.00
2. Double swiping – credit or debit card didn’t seem to go through the first time so the cashier swiped the card again, effectively doubling the charge
3. Bank (or credit card company) error – overcharging bank fees, depositing money into the wrong account, etc.

Recently I complained to Bank of America because my checking account was assessed a $25 monthly fee. I was told that it was a “known issue”, and was refunded six months of bank charges. Shame on me for not catching it sooner, shame on them for not telling me (or the thousands of other customers affected).

Get into the habit of entering credit and debit card transactions into QuickBooks, directly from the receipt. When your monthly statement comes, the reconciliation process will clear up any mistakes. This sounds awfully basic, but again, you’d be surprised how often I find mistakes on statements coming from institutions you’d otherwise trust.

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.

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.

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.