Financial And Accounting New Year Resolutions
I did something I tell my employees not to do: Never bring me a problem without a solution. In last week's NEWSLETTER, I published my annual list of New Year Resolutions that I recommended for you and me, but I didn't tell you how to accomplish them. Not that a resolution is a problem. But if you want to do something and you aren't sure how to do it, that can be a problem. So, to the degree that I suggested a resolution that you may not have known how to accomplish, I gave you a problem without a solution.
Over the next few weeks, I'm going to redeem myself. If you will think of those resolutions as the skeleton, I'm going to provide you with the meat to put on those bones.
As mentioned in last week's article, I've already written about many of the resolutions - most of which are posted on my web site (see link below). Regardless, the next several NEWSLETTERS will include a series of Feature Articles that will give you more information on each resolution category, beginning this week with the first category on my 2002 New Year Resolution list, Accounting and Financial.
Resolution One: I resolve to do a better job of managing my company financially.
I'm not presuming you haven't been doing a good job in this area. I'm only suggesting that we make improvements from wherever we are in our financial management journey of understanding. As our parents, teachers, and ministers told us, there is always room for improvement.
Business owners can NEVER stop being diligent in the financial management of their businesses. Stay close to the quantities, line distribution, and age of your inventory. Stay closer to your Accounts Receivable report. Become one with your expense management.
Even if you have hired someone to manage those areas on a daily basis, remember this: You can't delegate the ultimate responsibility for your business's financial performance.
Resolution Two: I resolve to create regular and accurate financial statements.
Okay, I admit that this is a little presumptuous. But I fear any insults I might be in danger of delivering would only be to a minority of small businesses. After more than a decade as a business consultant, I'll wager that less than half of small businesses consistently produce regular (at least quarterly) and accurate profit-and-loss statements and balance sheets.
I'm going to repeat something I've said at least a hundred times on my show and several times in the past two years in this space: If the only financial report you have is the P&L and Balance Sheet you get once a year with your tax return, using that information to manage your business is like making a salad with 15-month old lettuce. The lettuce is metaphoric - the 15 months is literal. In either case, the result is rotten.
With all of the electronic double-entry accounting capability available today, there is NO EXCUSE for EVERY small business not to be producing and managing with current numbers. These programs can cost as little as the price of a dinner-for-two, will work on inexpensive personal computers, and are virtually idiot proof. If you can read, add 2+2, and operate a mouse, you can be on your way to do-it-yourself financial statements in very short order.
The direct benefit is the ability to manage your business with fresh lettuce - I mean numbers. But there are also several indirect benefits that result with virtually NO extra effort:
In order to create financial statements, you will be entering sales, purchases, disbursements, etc. As you place that information in your program, you are simultaneously creating the ability to produce invoices, billing statements, sales tax reports, inventory records, and accounts payable and accounts receivable reports, just to name a few. How would you like to have the time back that you may currently be spending to create those records from scratch?
Business owners who do not use electronic capability to create their business's financial information are like someone eating a meal with their hands when they know that knives and forks have been invented.
Resolution Three: I resolve to learn more about what my financial records are telling me and, armed with that valuable information, manage my business more effectively.
Remember what the dog said after he chased the car and caught it? "Now that I've got it, what do I do with it?" Now that you've made a commitment to manage with current financial information, and have created your financial records, what do you do with them?
If you're worried that accomplishing this resolution means you have to become a bookkeeper or accountant, stop worrying - it doesn't. But good business operators must at least understand the flow of the financial components of their businesses, and how each one affects the others.
Some have proposed that there ought to be a test that moon-eyed first-timers are required to pass in order to get married. Since babies don't come with instructions, others have suggested the same threshold before becoming parents. And since they will get to spend my tax dollars, I say an economics test should be passed before anyone can run for elected office. In this spirit, I believe business failures could easily be cut in half if anyone wanting to become a business owner were required to pass a course that taught the basics of cash flow, accounting, and how to read and understand financial statements.
Do you know how to find out why - incredibly - sales are up but you're out of cash? It's on the Balance Sheet.
Do you know where is the first place to get an early tip that inventory may be creeping up? It's likely in your Gross Profit Margin, right there in the middle of your P&L.
Do you know where to find why you're not profitable even though you know you are maximizing margins and holding down direct expenses? The answer may be hiding in some of those annoying P&L line items like "Bank overdraft fees" and that insidious "Miscellaneous" account.
If you didn't know the answer to these questions, let me tell you how you can solve that problem: Do Financial Resolution Two EVERY month.
If you build your statements, the understanding will come.
Resolution Four: I resolve to find out how my company's financial performance compares with that of my peers.
Every industry has its own rules-of-thumb for how much a business in that sector should be spending, and how much profit they should be making, all based on sales volume. There are ratios and percentages, produced by aggregating the financial statements of many businesses in a particular industry, for everything from payroll to payables, from inventory to interest, and from debt to deferred compensation.
Industries and financial institutions have been compiling and recording these indicators for so long, in such significant numbers, and at all levels of activity, that they are used every day by sophisticated managers as valid reference points from which to measure their business's performance.
Would you like to be able to call yourself a sophisticated manager? Find out how your peers are doing, and put your numbers up against theirs. Robert Morris Associates is one publishing firm that offers this information. There are others. They don't give it away, but it's not expensive. You may be able to find these publications at your local Chamber of Commerce, public library, or Small Business Development Center.
Or you could check with your industry's trade group. You will likely have to join to have access to their numbers, which will be money well spent.
Write this on a rock... The more you educate yourself on the financial fundamentals of business, the more you will seek financial excellence for your company. Along the way, you will become a sophisticated and successful manager of your business's financial performance, and you will like the performance trend you will see.
