So you have been reading our emails. Your taking your finances seriously, you are making sure that your expenses are being booked to the correct accounts and are closing the books. Now you have a set of freshly printed financials sitting in front of, and now your thinking "Ok Alex, now what?"
Reading financials is like knowing how to read another language. While making sure that the last number at the bottom of a financial statement is black or without parenthesis (notating a loss) it's not the only aspect to look at. An Income Statement is a snapshot in time. It shows you how you did for the month, year or year to date by showing how much income came in during the time period and how much it cost to generate that income.
The best time frames to review are the previous month and year to date. Why both? It represents a tactical and strategic view of your business. Reviewing the previous month can let you know if any issues have come up that need to be investigated and addressed. You should always take into consideration any seasonality or peaks and valleys that occur throughout the year especially if your business is driven by weather or seasons. Any strategic or long term business decisions should be based on your year to date. In essence when you review your financials you should look to see how the current month contributes to your year to date, you don't want to rewire your entire business due to one off month.
There are also some calculations that can be used to help know how well your business did. Gross profit margin can let you know how much of the income you were able to keep after expenses. Calculating the percentage that an expense item is to total revenue is good to know which expense line item is the highest. You can also compare your financial statement to a budget if you have one to see how close you came to expectations. Comparing current month to previous month or to the same month from the prior year can also be good ways to measure how well your business is doing. Some other calculations you can perform are average revenue per client or comparing sales volumes to budget or other periods. This allows for a holistic view and incorporates operational volumes.
While it is tempting to look at expenses and to see what can be eliminated in terms of costs, it is not the only part of the business that should be scrutinized. Yes, a business should run as lean as possible but instead of cutting costs, look to increase the value your getting for your business dollar. Also look to see if your advertising costs are providing you the sales you need for your business. There needs to be a balanced approach where both sales and costs are reviewed for opportunities. Avoid the mistake of trying to make your business succeed from the expense side of the income statement only.
So knowing how to read your income statement will provide you a wealth of knowledge of not just what is going on with your business but also what opportunities there are for your business to be more successful. With knowledge comes power, the power for better decision making and driving success.
Month end close, what is it and why is it important? This is a process that is carried out by accountants and bookkeepers where the books are closed or properly wrapped up. The reason it is important because it provides data and information to create financial reports that can help business owners and managers make smarter business decisions. If all items are not recorded and not recorded in their correct categories financial reporting is inaccurate and becomes irrelevant to the business manager or owner. Another reason it is important? You know where your business stands as opposed to going a whole year and learning your business had a loss. This allows you to make adjustments and correct any issues so that they don't linger all year.
The process of month end close requires gathering all information and transactions that have occurred during the month. Depending on whether a business uses accrual or cash basis dictates how transactions are recorded and how they are presented in reporting. Receipts for items such as inventory, travel expenses, meals, office supplies, etc. are gathered and recorded not just to the correct month, but to the correct expense line item or balance sheet account and if necessary the correct line of business. Another reason that properly recording expenses are important is due to the tax benefits some business expense items have. Journal entries have to be made as well recognizing transactions such as payroll expenses.
Once all transactions have been accounted for and recorded. Then accountants and bookkeepers run certain reports to ensure that all accounts are in balance. Once this is done financial statements and balance sheets are run and can be presented. In some organizations financial analysis is performed with ratios, volume/rate analysis, to help determine what is going on in the business.
With the increasing development of decision science and the marrying of operational and financial data new analysis and insights are being brought forth that go far beyond just whether there is a net profit or net loss. This kind of analysis gives a holistic view of the business and emphasis on what is referred to as business drivers. Business drivers are defined as the crucial factors that are vital to the continued success of your business. It isn't just sales but factors that impact operations and sales.
As we can see month end close and the accurate recording of business expenses provides the foundation for accurate, actionable reporting and analysis that can provide business managers and owners with the necessary tools and information to make better business decisions.
Recently I met a young man who does marketing and works to promote female entrepreneurs. Invariably I checked out the website and Facebook page. There was an article about the 7 things that a a small start up or small business should do. For the most part it was a good article (although it did state that you should always pay top dollar for marketing) but I was shocked when it came to finance it stated that if you can't find a financial guru "just find someone who can manage money". This is irresponsible, dollars are the life blood of any business and the odds are already against small businesses.
Financial experts are no longer scorekeepers, they are a CEO's strategic partner responsible for helping determine the drivers for the business, how best to measure them and provide decision support. The world of finances has moved beyond counting cash and taxes and require analytics and decision science. Operations are heavily reflected in financial activity. Financial experts can interpret results and help the CEO develop overall strategy as it relates to the business. A financial expert or business manager can also help navigate a small firm as it starts out.
All data continues to show that small businesses fail and that many of the reasons is related to finances.
Small business stats:
1) There are almost 28 million small businesses in the US and over 22 million are self employed
2) Over 50% of the working population work in small businesses
3) About 543,000 new businesses start each month but right now more businesses shut down than start up
4) 7 out of 10 firms survive the first two years, half survive five years, a third survive ten years and only a quarter survive over 15 years
5) Number one reason businesses fail is because they run out of money
Research from the 2013 Global Entrepreneurship Monitor report which was produced by Babson College and other universities found that the top reasons for businesses closing in the U.S. were problems related to financing and lack of profitability, these were cited in more than half of businesses that closed.
This is the reason why a financial expert is crucial for small firms and start-ups. While we can understand that finances are not as sexy as marketing there is nothing sexy about bankruptcy or failure. Small businesses need a good strong team. While your marketer is responsible for crafting your message and telling the story of your small business a financial expert will help you navigate your small firm or start up through the dangerous waters.
Consider these questions: Do you know your burn rate? What is your break-even point? How much cash or time do you need before you get there? How much operating cash do you have on hand now if your business had to stop operations and how many days would that cash last? How much revenue is your marketing generating? Not how many click or 'Likes', while these can sound impressive ask what percent of clicks and likes become paying customers. Someone who can only manage money can't give you that information. Do the questions give you pause as a small business owner? They should. The answer to these questions can mean the difference between success and failure. A financial expert, a guru, can help your small firm from becoming another data point in the vast records of closed businesses.
The recent hack of Sony's systems have been in the news like so many other hacks. What makes this one different is the information that has been made available. While other hacks were about national security or personal debit or credit card information, this hack stems from a movie that Sony produced. The emails that have been released have been perhaps the most damaging since they contain personal opinions and commentary from everyone at Sony up to it's executive leaders about actors and even the President.
One would say that smaller businesses are more vulnerable since they may not have IT security measures or software like Sony so all of their information could be attained by a novice hacker. There are a couple of lessons from all of this.
1) Business emails should be all business. Because the line has blurred between our personal and professional lives we may get complacent and mix our content with our communication channels. Never add personal thoughts about others like coworkers, vendors, competitors or clients. Remember also that emails can be admissible in court for cases such as slander. In this case it's best to follow your mom's advice, 'if you can't say something nice about someone...'
2) Be selective when emailing. Remember, an email travels along a long path passing many different servers and equipment before reaching it's intended audience. Google, Microsoft and ISP's are always scanning emails for marketing opportunities so hackers may be able to as well. If a phone call or face to face would be appropriate for the information that needs to be relayed use those channels instead.
3) Have a policy or rules for emails. Setting up some rules about the appropriate use of email in a work setting is good especially if you have employees. If you are a sole proprietor or smaller organization make sure to keep your business and personal communications separate and be mindful of the information you transmit.
4) Most importantly, never ever click on links in emails that appear suspicious from unknown persons or vendors/clients. Hackers are getting more and more sophisticated with this process. They will send an email with malware that will collect your contacts and email them so your contacts believe they are getting an email from you when in reality they are getting an email from the hacker. Always check the address that it is coming from since this can be a dead give away (ex. the name display is John Smith from ABC Company but the address is firstname.lastname@example.org) As always, if you know the person and are not sure about the email you can call them to verify whether it is legitimate or not.
While it appears that anyone can be hacked, keeping business emails, business can help prevent alienating others around you, damaging your small businesses reputation or brand or opening your or your small business to slander and defamation.
Change is inevitable, nothing remains constant. This year has been a year of many changes for me personally. I proposed to my fiance, I lost my father, we made some changes in our firm to better manage or be more efficient. There is nothing we can do to stop change, but we can take steps to manage those changes.
There is a whole specialty and management philosophy known as Change Management. It is usually part of project management and has to do with dealing with the aspects of implementing changes. The reasons that could be driving change can be external or internal to the firm. It can be changes in the industry or changes such as technology or the advent of social media that can create the need to change to keep up or remain relevant in the new environment.
To effectively manage change there are four steps within the process:
1) Recognizing changes in the business environment (industry, media, technology, etc.)
2) Develop adjustments to meet the companies needs
3) Communicating, training employees to the coming changes
4) Buy in from everyone in the company
There are other factors that can impact how much effort it may take to carry out change like how ingrained is the culture? Are leaders committed to the changes? Does the firm or organization have the capacity to adapt to the changes and will adapting changes bring about the desired outcomes or meet the business needs?
Successful change management will be efforts where:
1) The benefits and changes are effectively communicated to stakeholders and employees
2) Employees are provided effective education & training
3) Fears and resistance effectively countered through communication, vision and training
4) Changes are monitored for fine tuning and adjustments
While we cannot stop changes, we can take steps to better manage how changes impact our small businesses.
One of our capabilities is dashboard development. What is a dashboard? It is a high level report that provides key performance indicators and is limited to summaries, key trends or comparisons. This tool allows owners or managers to see at a glance what direction their business is going in or if there are issues. The term dashboard comes from the automobile dashboard where drivers can monitor the various aspects of the cars operations via a cluster of instruments in one location.
Four essential elements for a good dashboard are:
1) Easily communicates information
2) Has minimum number of distractions
3) Supports the business with meaningful or actionable data or information
4) Utilizes human visual perception, visually communicates information
Dashboards can be utilized by any area of the business such as sales, operations or finance. A dashboard for the entire business or all operations can be created showing key indicators for each of the functional areas as well. As with any report, knowing who the audience or the consumer of the information (sales manager, finance director or CEO) will help in knowing what information or view is needed.
We recently created a dashboard that has data in regards to new business filings and currently active businesses. We used data from RefUSA. We included all new business filings and for active businesses we used registered and verified businesses with less than one million in revenue and less than five employees. Below are a few screenshots of sections of the dashboard.
As we can see the information gives us a good view of smaller businesses in Bexar County. From above we now know that new business files in Bexar County have been steadily increasing since May. The percent of home based new business filings has also been more than 50% since May as well. We know that there are 47,028 verified active businesses and that 34% are female owned businesses. The one aspect that stands out is that even though 30% of registered businesses are Hispanic owned, as an ethnicity Hispanics in Bexar County are more successful in keeping their businesses open (only 12.3% closed) while African Americans in Bexar County face greater challenges (22.3% closed). (To see the full Small Business Dashboard with info for Texas and the US click on the pdf link in our Business Counts section or visit the newsletter tab on our website)
Dashboard design is almost like a fingerprint, each one is unique and is driven by the needs of the business and what the business feels are the most important aspects that should be measured. You can't use a cookie cutter approach and apply a template to different businesses. Knowing what drives your business and how best to measure it will aid in designing a dashboard for your small business.
I recently was on a LinkedIn forum for CFO's and a question was raised, 'what has more bottom line teeth, revenues or expenses?' There were many great responses and feedback from seasoned financial officers but the consensus was that you have to address the impact of both and pursue a balanced approach.
There has been in the last few years an inclination to look only at reducing the expenses to increase the bottom line. Many large corporations have been looking at ways to continuously reduce costs. But you have to take a realistic look at your expenses. If your expenses are large or bloated then yes you will definitely need to review expenses to see where you can make improvements, but you don't want to cut into muscle and cripple your business. There are some expenses that are necessary for your business to exist. These fixed costs cannot go away or be made to disappear. Also each new client creates an incremental increase in operating costs, there is no way to increase revenue without a corresponding increase in expenses.
Financial officers always look to and try to contain costs because it is the part of the business that they understand and can control. Revenue is a product of sales and in larger organizations is handled by a sales team or a larger marketing organization.
But to manage both effectively you need information and analysis. What percent is your fixed costs and variable costs to your revenues? Is this percent consistent month to month? What is your revenue per client or product? How much of that revenue per product is going towards fixed costs and variable costs? Are your costs per product or client even with or higher than your revenue per product or client?
A pricing model can be critical because it forces one to account for fixed costs and the variable costs that you have for each client you service or widget you produce. Once you have this information it can also help to determine the minimum sales you need to break even. Any sales plan that goes below this will mean losses for the business. With knowledge of what the incremental cost per client or product is you can forecast out the increase in costs for each benchmark in sales. This lets you know what your max capacity is and at what sales level you would need invest in assets or equipment to take on more sales. As your sales increase make sure that your percent of expense to revenue stays consistent, wild or erratic changes in percentages should be reviewed.
As with all things, a balanced approach is the best way and constantly reviewing opportunities for improvements for both your revenues and expenses have the biggest bite to your bottom line.
The Spurs have been consistent. Yes, I realize that is an understatement, but it is their key to excellence. Their business model is based on their vision; to consistently put a winning team on the court and consistently win games.
Is was Vince Lombardi that said "Winning is not a sometime thing, it is an all the time thing. You don't do things right once in a while...you do them right all the time."
From the coach, to the front office, to the players to the ownership, they have been consistent in their efforts, teamwork, dedication and their drive for success. The Spurs have consistently put athletes in positions that play to their strengths, while some of these athletes may have been waived or passed over by other teams in the league they came to San Antonio for a dramatic renaissance or make a Lazarus like comeback. The Spurs have consistently exercised discipline and focus, not just on the court but off the court as well which is why you would be hard pressed to find a player make the tabloid pages. While some may think of consistency as repetition or becoming predictable, it is providing predictable, reliable results every time. Coach Pop consistently looks for ways to improve his game plans by adjusting and tuning his offensive and defensive game strategy. This last season was a great example of this. After the loss in the finals of the previous season, Coach Pop went back and looked at game tapes and came to one conclusion, the ball needs to move faster. He adjusted his offensive strategy, the team adopted and embraced the new direction. The team was able to provide consistent results, all players contributed regardless of their time on the court and the season culminated in a championship. Consistency allows for measurement, accountability, relevance and establishes your reputation.
My father would tell me; "Consistency, Consistency, Consistency!" My dad was consistent in the things he did in his career and his personal life. It was something that he picked up in the Army with the 2nd Infantry Division. I think back on my fathers life especially now that he passed in June. He was interred at Ft. Sam Houston with full military honors being a veteran of The Korean War. Dad believed that consistency was the source of excellence, the path of success. You had to get good at what you do and be consistent about it. To my dad it was the only way.
It is consistently giving up a good opportunity for a great one, consistently working on and mastering your fundamentals, consistently managing your business and cash flow and consistently providing great customer service/experience.
Consistently doing things right all the time will ensure that your small organization has a long and successful run.
The Spurs emphasize the fundamentals, passing, shooting, blocking and playing together. Even Tim Duncans nickname was The Big Fundamental (before being named Old Man Riverwalk) Fundamentals are the foundation for any endeavor. If you want to build a strong house, a strong relationship, a strong sports team or a strong small business you need master the fundamentals for a solid foundation. For small businesses those fundamentals fall under financial, marketing and customer service.
Cash flow is the life blood of any business. Without a firm understanding of your finances and the effects operational decisions have you can't get to the awesome marketing campaigns. Many startups run out of money before they get to breakeven or even bringing a product to market. Good financial fundamentals include financial controls, good data, financial reports, budgets, forecasts and a financial strategy. None of this is sexy but it's vital. Without cash you can't do anything else.
Next is your marketing. Before you get sold on glossy marketing materials and splashy ad campaigns there some fundamentals. What is your brand or your business all about? To advertise you need to communicate about yourself and have a call to action. Measurements, what is the ROI on your marketing? What campaign is bringing in clients? Is that billboard bringing in clients or are people so distracted by the radio or texting to see your billboard? A good marketing expert will learn about your business to determine the most effective way of communicating your brand and not be afraid of measuring marketing effectiveness.
Customer service is huge as well. You have to leave your customers with a positive experience every time. Take care of the need first. Customers feel better when they feel you are looking out for them by asking what the need is and providing options that fit. This also build a degree of trust which can go a long way to providing repeat and referral business.
These are some of the fundamentals that can help drive small business success. As with all fundamentals these need to be worked on consistently to ensure and allow you to build your own championship organization.
The San Antonio Spurs have won their fifth championship. The Spurs now have the highest winning percentage of not just any basketball organization but any sports organization and have broken a number of records in the last two finals. Forbes lists the Spurs as number 10 on Forbes NBA Team valuations
One of the thoughts stressed by coach Popovich is give up a good shot for a great shot. This entails a player not taking or passing on an opportunity for a good shot and give the ball to a teammate who is in a position to take a great shot. This brings to mind a comment I once read that says you have to say no to the good so you can say yes to the best.
There are opportunities and choices that are good, but are they the best? There is always a limit to the time and resources available but this is more pronounced for small business owners. Small business owners do not have the cash flow or other resources of larger organizations and so being able to do this is more critical to small business owners.
Knowing the difference between good and best means knowing what is needed. What qualities are required, what needs have to be fulfilled? You need a benchmark in your mind to know when opportunities are good and when they are great. You also have to be realistic, while having a vision and a full checklist is good you also need to know that you will only get close to getting everything on that list. You also have to be able to walk away from an opportunity. Having a benchmark or vision of what the best solution or opportunity is will help, but it can still be hard to walk away from opportunities. Remember, as a small business owner you may have to walk away from many good opportunities to be able to accept great ones.
While no one wants to give up a good shot at an opportunity saying no will leave you open for taking a great shot down the road and help you build your own world class organization.
Write something about yourself. No need to be fancy, just an overview.