Will it be your accounting practices that turn a business around?
Managing change and a turnaround
Every business needs the ability to change and adapt quickly with an intelligent eye on what’s possible, with the means to utilise the new technologies. Those who don’t keep an eye on the future may be doomed to remaining a prisoner of the past. With an eye to the future, you must welcome innovation, embrace change and learn to thrive in chaos.
More often than not, the greatest business successes come from underfunded, inexperienced entrepreneurs, who recognise they need to start doing things differently, not people who spend all their time applying and sticking rigidly to the long-accepted accounting principles.
“Managing change is recognised as one of the key drivers of competitive advantage, growth and success in any business. How you understand and use change differently from your competition to improve performance, may become your secret weapon for future growth and sustainability. Many of the challenges may be overcome by managing change, including how you manage your financial accounting”. Peter Sergeant
Keep in mind that many focus on top line sales growth at the expense of the value of their businesses, so it becomes important to know exactly what your future focus and strategies are. Chasing growth can be costly and typically comes at the expense of your margins, so it is important to know some of the key financial data and understand it sooner rather than later.
The exponential progress in technology is an undeniable factor in influencing every aspect of your business. How you utilise technology and manage your time along with the impact of radical innovation will determine your future profit, growth and sustainability, which directly impacts on your quality of life.
A paradigm shift
Making a paradigm shift in accounting practices is as hard as making a shift in new marketing approaches, it’s not for the faint hearted or for those resisting change.
Ask yourself “how valuable is my time”. While you need your accounting software as part of automating your business processes as well as controlling your stock and debtors, but that doesn’t mean you need to do the inputting. Stop trying to do everything yourself.
Engage a professional to do your bookkeeping, one with a new cloud-based accounting package (Xero is an excellent package). You can easily do your own invoicing, be aware of what is going on, through to tax returns.
You may be a one-man-band, but this makes your time even more valuable. Try to outsource everything you can at a cheaper rate than your hourly rate. You can be spending this valuable time with family, or developing your own profit generating ideas further.
Replacing the generally accepted accounting practices to track spending, enhance profit and cash-flow management and assessing the health of your business, is in question. Bucking the system can be difficult, but usually worth the risk. Just because something appears to be true and “everyone does it”, doesn’t mean it is the only way or the best way.
Growth is intoxicating and may fuel your ego, but remember, it is the growth of your niche products and services that really increases the value of your business and the fun you have working with it.
Like anything new or different you will encounter opposition from people who are firmly committed to the old paradigms.
Making the change
There are already huge concerns about having the qualified human resources to manage future opportunities that may lie ahead of us. How are you to compete in the super-charged high-tech global economy of the future if you do not have the will and ability to make changes? For too long this message has been ignored or not addressed with the resources required to make a difference for the business and the individuals involved.
Smarter, faster, leaner businesses are being led by the new information technology and communications. Businesses will be shaped by cloud computing, mobility, analytics and the information explosion. New and complex changes are emerging in these areas that will force you to operate in entirely new ways. The real-time connection of supply chains, markets and businesses represent a new challenge for all organisations.
Take a look at your latest profit and loss statement. At the top you have sales or revenue, then costs of goods sold, then gross profit, followed by expenses such as marketing, administrative costs, wages and other general expenses and finally the net profit.
If you are like most business people, you take your salary from the net profit and hopefully leave a profit. Lifting your salary to the top of the profit and loss statement will not only put petrol in your tank but stop the financial arguments on the home front.
For years financial experts have been saying “pay yourself first” if you want to be successful. However, the financial reports and practices actually direct you to spend first, then pay yourself last. How are you going to grow a successful business and accumulate wealth using that method? Generate more revenue is a good idea, except that you’re going to spend it. So you’re right back where you started, working harder and taking what is left over if there is any.
This is good advice because most of you tend to fit your expenses to fit your income. You spend more when business is good, less when things are bad. No matter how much you earn, you seem to find a good reason to spend every dollar, but, if you want to be successful, it must stop.
Restructure your profit and loss statement
My proposition is to look at your accounting in a totally different way, by re-structuring your profit and loss statement as follows:
- Gross Profit required.
- Your salary.
- The cost of goods sold.
- All other expenses.
- Net Profit.
Now, when you change to using this model and your new profit-and-loss statement shows red ink, you are losing money, your attitude will quickly focus on how you get everything back into the black. You will quickly stop focusing on the business’s profit and more importantly focus on the expenses and the sales, placing emphasis on the expenses that generate profit and eliminating the ones that don’t. This simple restructure forces you to follow what you suspected all along, your margins are not good enough and your expenses are out of control.
Now you must determine how much profit to deduct? Review your current profit and loss statements to determine the net profit you want the business to make 5%, 10%, 15%, 20%, which will vary with every business according to the dividends the stakeholders involved are looking for you to achieve? Whatever it is, set the percentage as your “net profit”, then every time you make a sale, take that percentage and put it into a special interest-bearing account.
Help your brain to cope and become better focused on what is really important in the business for it to succeed and become sustainable. Have your accounting system and bookkeeper deliver the information you need, when you need it, directly to your brain, on time every time, not via old reports.
Measuring your performance
Do you measure the success of your business solely in terms of profit and loss? This is crucial information, of course, but to get a truly accurate measurement of the state of your business’s financial health, consider broadening the scope of your analysis and where you focus your time. With some focused monitoring and analysis, you’ll have a much better understanding of where your efforts are most effective and where you need to adjust your processes to avoid a setback and achieve your aspirations.
Here are some ideas that will help you to get out of the ‘blame game’.
- Identify your objectives, strategies and actions. What do you aim to accomplish, who is going to help you and how are you going to get them excited about helping you.
- Develop key performance indicators (KPIs). How do you propose to achieve and to measure your progress? Most rely on financial statements and sales results as their primary indicators of performance, but you can develop many other KPIs that fit your particular business and involve other key aspects of your business.
- Measure what’s most important to your success. It may take a little time and effort, but after arriving at what information is critical to track for future performance, you can refine your KPIs and focus on collecting the relevant data.
- Decide on appropriate metrics. This allows you to accurately measure your performance against your objectives and KPIs. Gathering this information helps you to find your best way to track, compile, and record the most relevant data to make your business successful.
At the end of every month and quarter and year, your business probably generates a balance sheet and a profit and loss statement. No matter how accurate these documents are, they’re only looking in the rearview mirror.
Don’t get me wrong, these documents are critical to being delivered on time, every time, even though the numbers may be quite small, but you need to introduce a range of performance measures that suit your business. Rethinking your Key Performance Indicators (KPIs would be a good place to start.
This methodology automatically forces you to be more prudent in your financial decision making, since your profit is deducted every time a sale is made. The benefit here is the improved control of expenses. This is because in order to keep your salary flowing you first adjust expenditure accordingly. Since your revenue will first go toward profit and then to your salary, there will be less to allocate to the expenses. This will stop you determining how much can be spent based on the cash you have in the bank.
It’s more important to focus on the right function of the business going forward which is your sales and marketing and the gross profit it delivers. Without sales you have no business and any accounting system is irrelevant. Use the right strategies and tactics to communicate this to everyone involved in the business and watch your profits soar. Old accounting systems and practices are based on historical information, not how to improve your profits and sustainability.
Approaching your accounting in this way will give you the ability to quickly track profit and growth without having to worry about your take-home income. The results should be consistently more profit and better more appropriate control of expenses. You will be able to track growth in a consistent way, which will appeal to investors and potential buyers of the business should you decide to sell.
We suggest mapping out what you are trying to achieve, match it to your passion and strengths and get on with it. If your objectives, strategies and actions are right the money will follow.
Successful SMEs know people aren’t waiting for the TV, mailbox or phone for you to reach them. They’re finding all the information they need themselves. They’re searching the web, reading the news, and asking questions on social networks, so obviously, this is where they need the most help. You don’t have time to work in the old paradigms.
SMEs should embrace international best practices to move up the value chain and become globally competitive. Better still you should be creating the best practices. Far too many SMEs see innovation and technology as expenses rather than long-term investments. You must become more innovative in the way you do business or risk being left behind.
FAQ Support can help you to change and re-think the way you run your business in order for it becomes more profitable and sustainable. Sometimes all an entrepreneur, or in fact any business person needs, is help with focus and strategy as well as being inspired and encouraged thrown in. Make the leap of faith and start paying yourself first.
Tips to change your focus
- Invest according to opportunities that will consolidate your future.
- Plan finances for the right and agreed-upon objectives, strategies and actions.
- Check your value chain and make full use of outsourcing.
- Take the time to plan around the risks involved.
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I believe the generally accepted accounting practices can be important when you need to submit financial statements to investors but can be a hindrance in growing a profitable business.
I have often worked with accountants on businesses in trouble, who are not profitable or have run out of cash, or both. The accountant’s approach is “let’s do a budget”.
By the time they have produced a meaningful budget, I have been out and about with the owner helping them to create new sales. Bingo, new sales equals new profit and improved cash flow hence the business is on its way again to profitability.
There is an old saying, “if you only have a hammer, you will see every problem as a nail”.