The Systems Thinker Blog

Business Improvement: Manage by the Numbers!

Posted byRon Carroll

You now understand that systems are the solution to your business challenges. Good systems increase efficiency, accomplish objectives, and give customers what they want every single time. Your business accounting should be the master system that measures the effectiveness of all your business processes—the operations of your business.

Think of your business as you would the human body. The body is a complex organization that has an important job to do. It must perform with exactness and on tight schedules. To accomplish this, the body uses systems that work together—the circulatory system, respiratory system, digestive system, nervous system, and so forth. The brain manages all of these systems and works to keep the body healthy and functioning properly.

The brain of your business is the accounting system. It processes all of the data related to the activities of the business and provides owners with strategic information to drive profitability and growth. “Managing by the numbers” is the method successful owners and managers use to operate a business that is also healthy and functioning properly.

Manage by the Numbers


Discover the true value of accounting

In many small to mid-size businesses, accounting is seen as the system used for paying the bills, reconciling the bank, invoicing customers, or preparing a tax return. It should be much more. It should be the system for gathering business intelligence.

Renowned business authority Peter Drucker says, "You cannot manage what you cannot measure." To which Michael Dell, of Dell Computers, adds, "Anything that can be measured can be improved.” Business accounting is the measuring and reporting arm of the business.

Accounting information reveals the strengths and weaknesses of a business operation (see SWOT Analysis). It tells the business owner what went wrong in the past and what can be done to improve in the future. Accounting systems reduce large quantities of complex data to simple and understandable information. This information contains the seeds of solutions for all business problems and is the basis for making mission-critical decisions.

Accounting systems bring all the resources of the business to bear on the creation of profit, the lifeblood of the business. When an accounting system is utilized properly it can make poor men rich. If ignored, it can make rich men poor. It is the most under-utilized tool of the average small-business owner. Even professional accountants do not always extract its full value.

Let's take a closer look. Business activities generate numbers, regardless of whether the owner pays attention to them. These activities are the specific daily processes and systems that create sales, produce products, train employees, service customers, and so forth. Strong accounting systems organize the numbers to produce a wealth of relevant information for running the business. For example, business intelligence may tell owners and managers:

  • "The company must do $100,000 per month to break-even."
  • "It takes an average of 52 days to collect accounts receivable."
  • "The plant is running at 76% of its capacity."
  • "Sales are up by 8% over last year."
  • "Labor costs are running 2% higher than budgeted."
  • "It costs an average of $400 per sales lead."
  • And much more!

The steady flow of information creates a reservoir of knowledge from which business decisions can be made. Good decisions will save or earn the owner far more than the cost of acquiring the information. The accounting system may tell the owner to hire a salesman, and what the new break-even point will become. It may tell him to discontinue an unprofitable product line, buy a new piece of machinery or raise product prices, and by how much. He or she will benefit by knowing the optimum level of inventory to stock or what should be the expected result of more advertising.

Owners make the best decisions when information tells them the financial effect their decision will have on the business—before they ever spend a dime! The outcome of managing by the numbers is better management, control, profitability, and customer satisfaction.

Counting vs. Accountability

Many business owners mistakenly think the root of the word "accounting" is "counting." They know their sales for the month, the bank balance, and how much money they owe vendors. Savvy business owners understand the root of "accounting" is not "counting," but "accountability." Each business system or process is accountable for a planned result.

Ask yourself:

  • "Is my lead generation system producing the expected number of sales leads?"
  • "Does our quality control system keep product returns at an acceptable level?"
  • "Is my employee incentive system boosting productivity?"

Effective accounting insures that all business activities are working together to produce profit. "Counting," or bookkeeping, is an overhead expense of doing business. "Accounting" is an investment that pays big dividends. Don't be without it!

Strategic information leads to financial control

To develop the perfect business requires a disciplined and systematic course of action. The business owner must understand where he is at, where he is going, and how he is going to get there. He uses strategic information and systems to achieve financial control. If managed and grown properly, the business will be profitable, reward stakeholders, and create financial and personal freedom for owners. Accounting plays a central role.

Managerial accounting is the art and science of managing by the numbers. Regardless of who does your accounting, you need it done. You need it done right. And you need it done right now!

One final point: Every business has one or two "key numbers" that drive its economic engine. If you have knowledge and control of these numbers, everything else falls into place. What are your key performance indicators? If you do not already have them identified, do so now, and get help if necessary. Attention to these key numbers will make all the difference to your success.

By the way, if "numbers" aren't your thing, which describes most people, be humble. Hire a "numbers person." If you get the right person, I promise it will be worth it!

The next major systems you must develop or refine are marketing and sales. A business will not exist for long if it does not have an effective system for getting customers in the door.

Step 5: Become an Obsessed Marketer
Back to Table of Contents: 10 Easy Steps to Grow the Perfect Business

 

 

 

 

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Tags: Business Systems, Measurement, Financial Systems

Small Biz Owner: Do You Have a “Scarcity” or “Abundance” Mindset?

Posted byRon Carroll

During challenging economic times, it is important for most small-business owners to run a lean business operation—cost conscious and careful with financial resources. However, a mindset of “scarcity” can be harmful while a mindset of “abundance” may be just the ticket to more prosperous days. Let me explain.

Scarcity and Abundance Thinking

The Scarcity Mindset

If I have a scarcity mindset, I tend to see winners and losers. Look, there is only so much to go around, and if you get more, then I will naturally get less, right? It’s a dog-eat-dog world. By carefully holding on tight to everything I have, I will be more secure, prosperous and happy. It’s not about wishing ill-will on other people. It’s just a way of thinking to protect what I have worked so hard to earn and accumulate.

The Abundance Mindset

If I have an abundance mindset, I tend to see everything in terms of win-win. There are unlimited resources and I am genuinely happy for the success, well-being, achievements, recognition, and good fortune of other people. I love to contribute to and celebrate the accomplishments of my friends, associates, and even competitors. The better they do, the better I do. Success generates more success. In my way of thinking, there is plenty to go around. I win. You win. We all win!

The Scarcity Organization

It is very easy to get into a scarcity mindset when a business is struggling and every penny counts. The normal instinct of many owners and managers in financial stress is to cut costs to the bone. But like dieting, this can be unhealthy if taken too far. For example, cutting corners to marketing activities can create some immediate and short-term financial benefits. However, profit margins are eventually eroded by severe cuts to core business systems such as marketing, accounting, or even hiring and employee compensation.

The Abundance Organization

It is a misunderstood notion that when the rich get richer, the poor get poorer. The truth is that when the rich get richer, the poor generally get richer as well. We prosper most when we help others prosper, when everyone in our network is doing well. 

In a nearby community, a reputable fast-food restaurant stood alone with no competition. They “owned” the neighborhood. Unfortunately, the store went out of business. A mile down the road is a cluster of twelve fast-food restaurants competing side by side. The parking lots are always full, and even the weaker stores are thriving. That’s abundance thinking!

Zig Ziglar, the great motivator, taught, “You will get all you want in life if you help enough other people get what they want."

With a mindset of abundance, the business owner should always be looking for the best value he or she can get when purchasing goods and services. However, getting the most value from vendors or employees does not necessarily mean paying the lowest price, just as giving the most value to the customer does not always mean being the cheapest in the marketplace.

As my outlook matured over the years, I paid more money for fast service and superior quality rather than less money to a questionable vendor with a lower price. I paid employees above the market rate because they “made things happen” that created value in my business. I put more money into my business systems and processes because the payoff far exceeded the out-of-pocket expense.

In my former world of accounting, I often gave clients ideas that saved them thousands of dollars. I sent them new customers and even became one of their good customers myself, only to have them mumble about a few hundred dollars in accounting fees I charged. They did not put a value on the significant non-accounting elements of our relationship. They had a scarcity mindset.

Which Describes You?

Compare some characteristics of the scarcity mindset to those of an abundance mindset. How do you think about and relate to your vendors, employees, and customers?

Scarcity Abundance
Not enough resources to go around
More than enough resources to go around
I Need to win/succeed I Need to be fair/we all succeed
I have the answers We learn from each other
Relationships of suspicion/doubt Relationships of trust
Adversary Partner/Ally
Expense Investment with a return
Focus on costs/tasks Focus on results/systems and processes
Buy time/hours from people Buy desired outcomes from people
Expect minimum required performance Expect high performance
Micromanagement Stewardship
Low morale High morale
Worry/Stress/Frustration Confidence/Peace

The outcome of an abundance or value-oriented mindset is the maximum utilization and development of people. The outcome of the scarcity or cost-oriented mindset is the maximum control of people. Over the years, I have learned that I want to control business systems and processes, but I want to develop people as valuable partners.

According to Brian Tracy, business author and teacher, the Law of Abundance is this:

“We live in an abundant universe in which there is sufficient money for all who really want it and are willing to obey the laws governing its acquisition.”

Achieving the more productive mindset of abundance requires a leap of faith for many of us. It is a counter-intuitive principle. Come to think of it, isn’t this the great lesson learned by Ebenezer Scrooge? (Charles Dickens, "A Christmas Carol," 1843)

 

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Tags: General Business, Culture, Laws/Principles, Business Leader, Financial Systems

Your Invoicing System: Six Tips to Get All the Money You've Earned!

Posted byRon Carroll

Do you care about getting paid for the goods or services you sell? Silly question, but many dollars are lost every day by companies with a lame invoicing system. It is not only possible but probable that some invoices are inaccurate, incomplete, or missed entirely. Scary thought, huh?

Invoicing System

So, I ask: Could your invoicing system be broken? How do you know? Have you checked lately?

I once helped rescue a company that provides services for people with disabilities. The business had two-million dollars of annual revenue. We discovered the company was missing many invoicing opportunities—EVERY MONTH! There were some billing codes overlooked by untrained people in a half-baked business system. We made a few simple changes to the invoicing process, and the company has been raking in the EXTRA cash ever since.

In another case, my computer sales and service vendor made mistakes on more than half the invoices I received from his company. I became conditioned to examine each invoice in great detail. Sadly, I couldn’t trust their work. Keep in mind that without a good system, this could happen to anyone, including YOU.

Effective business systems and processes are the only way to put important details within your control!

Six Tips for Improvement

For companies with varied and/or complex sales transactions, inaccurate invoices can leak a lot of profit over the course of a year. And what’s worse, you may never detect it!

Here are six tips to keep you from losing some of your hard-earned money.

  1. Review your sales invoicing procedure and identify ways money could slip through the cracks. Modify your procedure to plug the holes and create a bullet-proof system.

  2. Require customers to provide a detailed purchase order—with prices if possible—that you can compare with your outgoing invoice. Contact the customer if there are any discrepancies.

  3. Be on guard for pricing mistakes or incomplete invoices. Look for legitimate billing opportunities that could be missed by your company.

  4. Consider adding a second approval for sales invoices over a specified dollar amount. Employees typically aren’t too concerned about invoicing issues; it’s not their money. So YOU or a supervisor needs to touch the invoicing system when bigger dollars are at stake.

  5. Perform an occasional spot check or audit of customer invoices for a particular time period. This helps keep people on their toes. Use the information you find to improve the system, not to scold people. If invoices are carelessly prepared, well, that’s a people problem you need to address.

  6. Collect money up front whenever possible. If you offer terms, create a strong collections system to get paid promptly when money is due. Big Tip: Receiving cash payments at the point of sale will have a significant positive impact on invoice accuracy and efficiency, cash flow, and ultimately your profit margin!

Create a Near-Perfect Invoicing System

This will not surprise you: if an invoice error is in favor of your customer, they usually just assume the dollar amount was adjusted down for some legitimate reason they don’t have time to inquire about. If the invoice amount is higher than your customer expects, you will definitely get a phone call. In the end, a mistake-prone invoicing system will rob you of hard-earned dollars, create unnecessary cost to research and rework errors, and diminish your customer’s confidence.

The invoicing system is one area of your business that should be near perfect (Six Sigma)!

Consider this fact: if your company makes 8% net-profit, you’ve spent 92% of the invoice amount filling the order. At that rate, it would require the net-profit from about thirteen orders to pay back the lost dollars of one missed invoice. YIKES! (see "Sales Equivalency—The Surprising Power of Cutting Costs!")

Now, go make sure your customer invoicing system is asking for all the money you deserve!

 

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Tags: Business Systems, System Example, Financial Systems

The Balanced Scorecard for Small Business—Set Goals!

Posted byRon Carroll

Organization leaders generally have a pretty clear picture of the direction they want their company to go. However, research shows that just 5% of the workforce understands their company’s strategy, and only 25% of managers have incentives linked to that strategy (Kaplan).

To help remedy this, Doctors Robert S. Kaplan and David P. Norton of Harvard Business School introduced the Balanced Scorecard in 1991. It has gained wide acceptance as an effective strategic management system, a performance measurement system, and a communication tool.

Simply put, the Balanced Scorecard enables organization leaders to convert mission, vision and strategy into specific and measurable goals, with action plans to achieve those goals. And it's actually quite easy to do.

The scorecard is described as “balanced” for the following reasons:

  1. It recognizes the need to balance financial indicators of success such as sales with non-financial indicators such as customer satisfaction (business measures).

  2. It balances internal requirements of employees and processes, with the external requirements of customers and shareholders.

  3. It looks at past performance (lagging indicators) such as financial statements as well as current performance (leading indicators) including the measurement of daily business systems and processes.

  4. Finally, it provides a balance between short-term and long-term objectives.


A completed Balanced Scorecard will not only link your business strategy to measurable company goals, but it aligns employee efforts and business processes to those objectives. It is the foundation for creating a culture of continuous improvement!

Balanced Scorecard

The Four Perspectives of Balanced Scorecard Goals

When setting Balanced Scorecard goals, you will look at your business strategy from four different perspectives.

  1. The Financial Perspective promotes strategies for growth, profitability, cash flow, return on investment, and mitigation of risk, as viewed by an owner or shareholder.

  2. The Customer Perspective promotes strategies for creating product value, market differentiation, and customer loyalty.

  3. The Internal Processes Perspective promotes strategies for developing high-performance business systems and processesoperational excellence.

  4. The Learning and Growth Perspective promotes strategies that create a culture of continuous learning, innovation, and the personal growth and retention of valued people.


While a Balanced Scorecard may seem like a tool for big-business, it is simply a form divided into four sections, one for each of the four perspectives. In column one, you write several objectives within each perspective. In column two, indicate a unit of measure such as numbers, dollars or percent. In column three, express the target goal in that unit of measure. In column four, briefly indicate your plan of action to achieve the target goal.

Below is an example of an abbreviated Balanced Scorecard developed by a home builder.

Financial Perspective (How can we increase growth, profitability, cash flow, and return on investment?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN
Increase Sales growth
Number of new housing
starts per month
10 new starts Expand geographic market / open new office
Improve profitability Percent income from operations 10% profit margin Reduce construction cycle time and unit costs

Customer Perspective (How can we create product value, market differentiation, "killer customer care," and raving fans?)

OBJECTIVE
MEASUREMENT TARGET ACTION PLAN
High-quality homes Points / quality rating of subcontractors Subcontractor must maintain 90-point average of 100 possible Create a “quality” score sheet for each sub and provide them job feedback
Fast completion
Average days to complete 30 days from building permit to close Intense scheduling system / reduce delay

Internal Processes Perspective (What systems can we create or elevate to achieve operational excellence?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN
Fast Start—Minimize time from contract to building permit Days in-process Submit application to city within 5 days of customer contract Reduce upfront interface and preparation time with customer
Effectively schedule sub-contractors Percent of work started at scheduled time 75% of jobs started within 1 day of schedule Purchase BuildStar management software

Learning and Growth Perspective (How can we promote learning, innovation, and the personal growth and retention of valued people?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN
Subcontractor certification Number of subs that are certified 75% of subs are certified Create subcontractor certification program
Improve staff building-process skills Number of skill sets times number of people 80% skill competency Create a staff training program


For instance, let's say from the financial perspective you want to increase sales by 20% next year. Your unit of measure is dollars. Your target goal is $1,000,000, and your plan of action is to spend 20% more money on lead-generation advertising.

In another example, from an internal-processes perspective, your goal is to reduce product defects. Your unit of measure is a percent. Your target goal is 99% yield, or expressed as 1% waste. Your action plan is to apply Six Sigma analysis to the manufacturing process and dramatically reduce production errors.

System Scorecards

The Systems Thinker also aligns goals at the system or process level with the major Balanced Scorecard objectives of the company as described above.

Let's take a closer look. A company Balanced Scorecard has an objective of 10% sales growth in the coming year. The action plan is to add six more sales per week. Based on the sales conversion rate in this example, the marketing department must receive twenty-four additional leads each week. To achieve this, their action plan for this System Scorecard objective is to increase the weekly advertising mailers by 1500. Likewise, the production department must increase its target to manufacture six more units per week.

Every department plays a role in accomplishing the high-level company goals.

By cascading the strategy and objectives down through all levels of the organization, every employee and internal process is engaged in achieving a common set of goals. People throughout the organization ask, “Which company objectives or measures are we in the best position to influence?” and “What can we do at our level to help the organization achieve its goals?”

Strategy is everyone's job in a Balanced Scorecard environment. It is a top-down responsibility to communicate strategy and unite the workforce, and a bottom-up responsibility to internalize and execute the strategy.

In one page, your Balanced Scorecard tells the whole story—everything important—about your organization's current strategy and targeted objectives!

I have prepared several worksheets to help you determine your unique business strategy and create a company Balanced Scorecard. You can get them in the Zone.

 

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Tags: Business Systems, Improvement, Business Measurement, Customer Retention, Financial Systems

What are Some Common Business Measures?

Posted byRon Carroll

In a well-run organization, leaders manage by the numbers. They measure and monitor business performance to improve results, and to guide their problem-solving and decision-making. These numbers can be expressed as leading indicators (real-time) or lagging indicators (historical). A few key numbers drive the success of every company—including YOURS!

Manage by the Numbers

Balanced Scorecard Measures

Performance measures are often established using a tool called the Balanced Scorecard. These measures reflect a company’s current strategy and goals. Below are some commonly used measures within the four perspectives of the Balanced Scorecard. Focus on the few numbers that matter most to you, and ignore the rest (unless they later become important).

Financial Measures

Sales or Revenue
Sales growth
Gross Margin or Profit
Contribution Margin
Profit Margin
Profit or revenue per employee
Return on Investment (ROI)
Dividends
Cash flow
Days in A/R (e.g., average of 75 days for collection of money)
Days Held in Inventory (e.g., 90 days of stock on-hand)
Inventory Turnover Ratio (e.g., four inventory turns per year)
Current Ratio (current assets divided by current liabilities)
Quick Ratio (current assets minus inventory, divided by current liabilities)
Debt to Equity

Customer Measures

Customer satisfaction
Customer retention/loyalty/referrals
Customer complaints/customers lost
Product return rates
Response time per customer request
Customer lifetime value
Customer acquisition rate
Number of customers
Annual sales per customer/Re-order rate
Average purchase per customer
Win rate (sales closed/contracts signed)
Marketing cost as a percentage of sales
Number of ads placed/response rate/proposals made
Sales volume/per channel/per square-foot of space
Frequency of sales transactions/mean-time between sales
Average customer size
Customers per employee
Customer service expense per customer

Process Measures

Average cost per transaction
On-time delivery/response time to customer requests
Average lead-time to ship product
Inventory turnover
Labor utilization and effectiveness rates
Defect percentage/Rework
Break-even point
Cycle time
Warranty claims
Waste reduction
Space utilization
Frequency of returned purchases
Downtime

Employee Learning and Growth Measures

Employees with advanced degrees/participation in professional or trade associations
Training investment per employee
Average years of service
Number of cross-trained employees
Absenteeism
 Employee turnover rate
Employee satisfaction
Reportable accidents/Lost-time accidents
Employee productivity
Training hours/certifications/leadership development
Personal goal achievement
Timely completion of performance appraisals

Financial Ratios

The above list will get you thinking about various ways to look at your business and measure performance. For more information, google the less-familiar terms you are interested in.

Many of the financial measures listed are lagging indicators known as business or financial ratios. They are often looked at by investors or bankers. Some of the common financial ratios are described with formulas at the following online locations:

NetMBA
Missouri Business
Online Calculator

Get everyone in your company behind the few critical numbers that drive your business strategy and goals. People should know every day how they are measuring-up. Frequent feedback is a powerful motivating tool.


Related Articles:

Numbers are the Language of Business Improvement!
Measuring Your Business Processes Pays Big Dividends!
Your Clues to Uncover Weak Business Systems!

Do You Know Your Key Performance Indicators?
Learn How to Do a Business Break-even Analysis (In The Zone)
Box Theory™ Gold Measurement Tools (screen shots)

 

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Tags: Business Measurement, Financial Systems

Improving Business Systems Can Reverse Cash Flow Cancer!

Posted byRon Carroll

In my business career, I’ve experienced cash-flow problems several times and have suffered vicariously with many of my accounting clients. Not having enough money to pay bills, hire people, or add equipment can be very distressing. However, the extra cash you need to properly run your business is available—if you know where to look. Don’t let a chronic cash shortage put your business on life support!

Diagnose Cash Flow Problems

Inadequate cash flow is usually the result of weak business systems or processes that fail to produce a profit or that keep working capital tied up too long. However, it is more than just a symptom of under-performing systems. Like a cancer, insufficient cash flow leads to a breakdown of one system after another until it eventually kills the business.

A Symptom and a Cause

Inadequate cash flow is both a symptom and a cause of system breakdowns.

Poor cash flow is a symptom of:

  • Unprofitable operations.
  • Inadequate margins; break-even is reached too late in the month.
  • A pricing system that doesn’t recognize true costs, or competes on low price.
  • Labor expense that is high due to worker inefficiencies.
  • Excessive waste, defects, product returns, or rework.
  • Slow collection of money owed; noncollectable bad debt.
  • Poor inventory management (too much inventory/slow turns/obsolescence).
  • Business growth and expansion that exceed financial resources.

Poor cash flow causes further system breakdowns because:

  • Owners divert business development time to cash-management headaches.
  • Important systems are scaled down or eliminated such as marketing, product development, or accounting.
  • Money is borrowed at high interest rates, further eroding of profits.
  • Heavy system busters are introduced such as start-stop work-flow, downtime, unpleasant work environment, and so forth.
  • Worker motivation drops, along with personal and system performance.
  • Employees quit, especially if payroll is delayed; less-experienced people replace them.
  • Owners can no longer hire the best people and the right people.
  • Credibility is lost with vendors, bringing tightened terms (C.O.D) and soured relationships.
  • A growing buzz in the marketplace labels the company, “in trouble.”

Diagnose the Root Cause—And Fast!

It is not uncommon for business owners to mortgage the farm, borrow money from relatives, get a bank loan, or take some other drastic measure to keep the sick patient alive. (Our family once sold a rental house to meet one payroll). However, if owners and managers do not diagnose the root cause of cash-flow problems, it is likely the patient will continue to weaken and eventually die anyway. The longer you wait to begin the healing process, the more difficult the cure becomes.

When poor cash flow causes enough system failures that the business can no longer attract customers or keep them happy, the organization will go into cardiac arrest!

If your company is experiencing slow cash flow, under-performing business systems are the culprit. Could the ailing system be in marketing? collections? pricing? inventory management? operations?

The strong medicine of daily improvement to your vital business systems and processes will soon have you in the pink. Don’t delay another day!

 

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Tags: Business Systems, Improvement, Financial Systems, System Failure

Your Inventory Management System - the Elephant in the Room!

Posted byRon Carroll

Recently, I was at lunch with a client that unprofitably manufacturers children’s toys. Our attention focused on the company’s inventory management. They had fallen victim to the same problem experienced by many business owners who sell from large inventories.  

I purposely startled the client by saying, “As much as you love creating and selling your wonderful line of children’s toys (insert your product line here), you are actually in the business of inventory management. How well you do it will largely determine the financial results of your company.

Inventory management is the elephant in the room for many companies!

Inventory Management - The Elephant in the Room

The Right Way

Effective inventory management requires constant attention, detailed data, discipline, and good judgment. Your goal should be to buy the right products, for the right price, in the right quantity, at the right time, from the right vendor. Get these five things RIGHT and you will see a big improvement in cash flow and profit.

  1. The RIGHT Product – Know your customers and carry products they want, not what you like or think will sell. Don’t let emotions drive your buying patterns, and don’t be lazy by purchasing a general mix of styles or models suggested by the vendor. Test every unique product (SKU) to learn the preferences of your target market. There are warehouses all over the world filled with slow moving and obsolete inventory—a terrible waste that you can avid. While some variety or completeness of a product line may be necessary, stay lean and stock-up with best sellers.

  2. The RIGHT Price – Work for your customers and become a strong negotiator. Shop around to find the best prices and terms—your lowest overall cost. Let vendors compete for your business if you can. Use detailed purchase orders to avoid costly mistakes. Remember that inbound freight is part of the cost. Take trade discounts when possible; they are pure profit. While buying and selling, always strive to maintain your expected profit margin, and increase it if possible.

  3. The RIGHT Quantity – Purchase in smaller quantities (even if it means a higher cost), and TEST-TEST-TEST before you commit to larger amounts. Products have a life-cycle so be careful to watch trends and spot the downturns. Lean inventory levels and frequent turnover reduce operational costs and improve cash flow and profit, as long as you don’t run out of product and lose sales. Inventory buildup for any reason can be a risky strategy, so be cautious!

  4. The RIGHT Time – The longer you can delay purchasing and still satisfy customer demand, the better your cash flow and the lower your carrying costs. Know your vendor’s fluctuating lead times—the number of days from your order to their ship date. Short lead times give you a significant financial advantage—fewer products gathering dust on shelves and more working capital.

  5. The RIGHT Vendor – Establish a good relationship with reliable vendors. Allow vendors to compete for your business, but leverage your buying power with one or two. Make sure your vendors have good systems and processes, and suuply consistently high-quality products. They should stay competitively priced and able to ship as promised. Vendors are among your most important business partners. Pick the best and be among their best customers (pay on time and help them keep their costs down). 

The Downside of Inventory

The only real virtue of inventory is that it allows you to fill customer needs quickly. Many companies today have discovered drop-shipping to avoid inventory altogether. However, if you are a manufacturer, or traditional brick-and-mortar distributor or retailer, inventory is a necessary evil.

Keep in mind that inventory comes with a carrying cost of rent, utilities, insurance, and labor to manage, count, and handle. Inventory ties up money and can keep you cash-poor, even if your company is profitable. Furthermore, bad things happen when products sit around. Merchandise becomes outdated and damaged. Quality problems go undiscovered and accumulate. Shrinkage is inevitable. Be smart! Be lean!

Good inventory management is a skill that takes time to learn. Nowadays, technology combined with disciplined oversight is essential to getting the job done RIGHT.

Remember: The velocity that products move in and out of inventory is a key to success.

Master your inventory management system—the elephant in the room—and you are well on your way to controlling your financial future!

 

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Tags: Business Systems, Financial Systems

Where Has Your Profit Gone—Eight Places to Look!

Posted byRon Carroll

Many business owners struggle to make cash deposits just in time to pay the bills that keep the grim reaper from the door. While owners should be focused on business development, customers, and profitability, they often get sucked into the day-to-day cash-flow crunch. This distracting pressure comes when cash flowing through the business is too slow and insufficient to meet daily requirements.

Keep in mind that profit and cash flow are two different things. Even if you aren’t profitable, you can have a positive cash flow for a while by working down levels of accounts receivable or inventory, or by borrowing money.

You can also experience negative cash-flow pressures even though you are profitable. This happens during growth periods when there is a buildup of assets such as inventory, accounts receivable, or equipment.

Having good cash flow and profit at the same time is the sign of a smooth-running business. However, even when things are going well, business owners often wonder (after seeing their financial statement), “If I made that much profit, where is it?”

Good question! Where does that slippery cash go? Let’s look at some of the places your working capital may be hanging out.

The Jar System

When I was a boy, most things were purchased with cash (there were no credit cards). My mother used a jar system to manage the family finances. When she cashed my father’s paycheck, she put the cash in jars marked “groceries,” “gas,” “charitable donations,” and so forth. It was a simple system to be sure she reserved enough money for each family need. 

Money Jar

 Applying the jar system to your business, let’s take a look at where your cash is going—the obvious places, and the more subtle.

  1. Jar #1 Your Bank Account – You should have enough cash in this jar to fund daily business operations and gradual growth. It is best replenished out of the company's earnings. When this jar has enough money in it, stress goes down, efficiency goes up, vendors, bankers and employees are happy, and there is time to do more important things. A healthy business has cash reserves.

  2. Jar #2 Inventory – If you buy more inventory than you need, or you have items that don’t sell well, some of your “cash” is sitting on a shelf gathering dust. By turning your inventory over faster—lowering stock levels, improving product mix, or increasing sales—you will be able to move cash from the inventory jar to the bank account jar.

  3. Jar #3 Fixed Assets – Did you pay cash for a piece of equipment, furniture or vehicle? Did you remodel or improve your facilities? If so, part of your available cash was invested in business assets and infrastructure, a wise decision if the result is better productivity or customer service. Just remember, when assets are depreciated (expensed over time), the profit on your P&L statement will not reflect the entire cost of the purchase right away, thus showing a higher profit. However, you will feel the effect on your cash flow immediately.

  4. Jar #4 Accounts Receivable – The more you sell with credit terms, and the longer customers take to pay you, the less cash you have to work with. You become a “bank” for your customers, giving them interest-free loans and temporarily tying up YOUR cash in THEIR jars.

  5. Jar #5 Customer Giveaways – If your gross profit margin is too low, you are essentially giving your customers a better deal than you can afford to—and no, you can’t make it up with volume! Some of your potential cash income is permanently left in your customer’s jars. Be wary of trying to win customers strictly on low price.

  6. Jar #6 Waste – This jar contains wasted cash from your business operations—mistakes, returns, rework and inefficiency. It also includes cash you fritter away on needless overspending. For example, you continue to keep employees you can’t afford, to pay for building space you could do without, or to incur other expenses beyond what you need to successfully run the business. This often happens when sales are down, and you don’t (or can’t) cut costs proportionately.

  7. Jar #7 Excessive Compensation – When owners or others take more cash out of the business for personal compensation than is justified by the profit generated, it can be a severe drain on working capital and cash reserves. Over time, you can “kill the goose that lays the golden egg.”

  8. Jar #8 Stakeholder’s Reward – This is my favorite jar. It is the excess cash generated by the business that can be used to pay dividends and increase salaries. It eventually moves into personal jars or is used to build value in the business. With it, you can buy additional assets, greater market share, and good-will. You can also improve your internal business systems and processes for even more profit. 

You Want a Cash Gusher!

Remember: the purpose of your business isn’t just to have your cash spin around from the bank account jar to the inventory jar to the accounts receivable jar. The true worth of your business is how much comes out the spigot and flows into your personal jar. You don’t want a drip. You want a gusher! This will happen when you realize that a cash shortage is the result of deeper problems. Get in The Zone and figure out what business systems are holding you back. Then improve them, and GIVE YOURSELF A RAISE!

 

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Tags: Business Systems, Financial Systems

Your Clues to Uncover Weak Business Systems!

Posted byRon Carroll

It's been my experience that many small-business owners don’t expect timely financial reports from their accountant and don’t use them to manage their business. BIG MISTAKE! 

Financial Report Clues

Your “Balance Sheet” and “Profit and Loss” statements provide a valuable report card of overall business performance. They reveal strengths and weaknesses, performance trends, break-even points, and other intelligence for decision making and problem solving.

This historical data is useful to stakeholders, investors, and bankers. However, its greatest value is to help YOU improve your business.

The Systems Thinker Advantage

As a Systems Thinker, you recognize that the numbers on the financial report point to business systems that are responsible for generating those numbers. 

You see the cause and effect relationship. The systems are the cause. The reported numbers represent the effect. If a number is disappointing, you can make it better by improving the faulty system at the source.

YOU are in control of your financial outcomes by being in control of your business systems and processes!

Systems are the Solution

Let’s consider a few business problems revealed by looking at a financial report, and the systems or processes that might be causing the undesirable numbers.

Income Statement

Sales revenue is down. Is your lead generation system attracting sufficient customers? Does your sales process successfully convert leads to sales? Does it include cross-sales and up-sales to maximize customer value? Is your pricing system giving you maximum dollars per sale? Is your customer-care system so good that customers keep coming back?

Margins are low.  Can you reduce costs? Could your purchasing system be improved to buy materials or products for less?  Could your pricing system be tweaked to increase sales or sales margin?  Could you improve your production or order-fulfillment systems to have more efficiency and fewer mistakes, returns, and rework?  Would an improved hiring, training, or incentive system payoff in greater employee productivity and reduced labor costs?

Balance Sheet

Accounts Receivable is high. Do you have an effective credit approval system? Is your collections system consistent and persistent? Could you change your sales terms to include full or partial payments at the time of purchase, or in ten days?

Cash reserves are low. Cash flow is poor. Is your inventory management system failing to keep the right products in the right quantities? Are you accumulating slow moving or obsolete merchandise, which ties up much-needed cash? Is a weak collections system leaving cash stranded in a bloated accounts receivable? Are profits dried up from inefficiency, waste, and too many ineffective business systems?

Count on Your Accounting System

Once trouble has been identified on the financial statement, you have no choice but to bear down and improve the system or process that is responsible. There really is no other way to solve the problem!

Remember: Accounting is your business system to measures the effectiveness of all your other operational systems; each of your core systems and processes should be accountable for a planned result. When they are performing at desired levels, happy numbers will appear on your monthly financial statement. Improved profit and cash flow will follow.

It all starts by developing good business systems and processes!

Next time your accountant provides you with a financial statement, put on your Systems Thinker glasses and peer through the numbers to identify the systems you need to elevate. And never forget that numbers are the language of business improvement!

Related Articles:
Measuring Your Business Processes Pays Big Dividends!
Do You Know Your Key Performance Indicators?

 

The Next Step...

Tags: Systems Thinker, Business Systems, Improvement, Business Measurement, Financial Systems

A Business System When the Wolf is At the Door!

Posted byRon Carroll

Whether due to a struggling economy, a slumping industry, or inevitable business cycles, many small- business owners at some time experience a decline in sales and profit, and a tightening of cash flow. When there isn’t enough money to go around, financial issues dominate our thoughts and daily business activities. If we are not careful, this challenging condition can also tarnish our shiny reputation with vendors and bankers.

I’ve been through this uncomfortable experience myself, and I’ve also helped customers of my accounting practice. I know the feelings of frustration and embarrassment. When you are powerless to pay your bills, you just want to bury your head in the sand. I get it, but please don’t do that! Instead, create a business system to get you through the (hopefully) temporary ordeal.

Avoidance

10 Tips to Hold Your Head High

Here are a few things you can do to turn your creditors into rooting fans:

  1. Be proactive. Don’t wait for your creditors to call you. They will call at all times of the day and continually distract you from doing the most important things, like increasing your sales. Set a little time aside every morning to call them when you are fresh and upbeat.

  2. Be reliable. If you tell the collection person you’ll call them next Monday, DON’T FORGET TO DO IT, even if the news is bad. This builds trust, and they will actually be impressed because most people avoid these painful calls.

  3. Be humble, apologetic, and calm. Don’t react if your creditor displays a harsh attitude. They have a right to be unhappy. Just accept it. Responding with humility will ease the tension; “a soft answer turneth away wrath” (Proverbs 15:1).

  4. Acknowledge the full amount of your debt. Though usually not spoken, your vendor will be relieved that you are not trying to find excuses or weasel out of paying the bill. If you dispute the amount, clear it up immediately. Get everyone in agreement going forward.

  5. Be honest and straight forward. Don’t exaggerate how much you can pay or how soon you can pay. Carefully manage expectations. If you can pay a little more or a little sooner than promised, you will get a gold star on your forehead.

  6. Pay small invoice amounts in full and on time. For example, pay everything under $250 or $500 by the due date. This goes a long way at reducing the volume of collection calls and letters. You now only have to deal with your larger vendors.

  7. Communicate often. It may be a good idea to email a general progress report to creditors each week, or periodically. When vendors get updated information, it soothes the savage beast, builds trust, and lets them know you are doing the best you can. And again, regular updates reduce those pesky phone calls.

  8. Set up a payment plan. Reduce the balance owing on past-due invoices while still buying more products or services. Make partial payments when you can. If necessary, establish a C.O.D. arrangement to alleviate their fears. Most vendors want your business. They know the economy is up and down for a lot of companies. They will work with you if they can see your effort and trust your word.

  9. Do not fail to pay payroll taxes. I have seen many desperate business owners make this deadly mistake, running up large penalties and interest. In the U.S., you are personally liable for payroll taxes. They will never go away. Furthermore, if you are not meeting your payroll on time, your business is at serious risk. Get help fast!

  10. Extreme circumstances call for extreme measures. Helping a customer, I once offered many of their larger vendors a 50% immediate cash settlement. I was amazed at how agreeable they were. The amount covered their direct costs (materials and labor), and they were grateful not to get stiffed on the whole bill. This, of course, is a last resort when you are running out of options. Most vendors will appreciate your honest and even heroic effort to help them cut their losses.

A Time to Build Character

Ninety percent of the time, business owners go into an avoidance mode when they are in financial trouble. Don’t let this happen to you. It is the worst possible thing to do. All trust is lost, and bridges are burned. Your personal integrity—and most valuable business asset—is permanently scarred.

Difficult times can be an opportunity to strengthen vendor relationships and earn respect. It is a time to show your true character. A good business system for communication can help you accomplish this and get you through even the most adverse circumstances.

Remember: Everyone—customers, employees, vendors and bankers—want you to succeed. They are all cheering you on. So am I!

 

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Tags: Business Systems, General Business, Financial Systems