by MHolland | Apr 18, 2024 | Accounts Payables, Accounts Receivables, Business Tips
Your monthly financial statements tell you a story….in the language of numbers…
Every business has three main financial statements:
- The Balance Sheet
- The Income Statement
- The Statement of Cash Flows
The Balance is the main statement. What? Not the Income Statement?
Yes, it is true that most businesspeople will focus most of their attention on the Income Statement.
They do this because the Income Statement shows the results of activities over a period of time – a month, a quarter, a year.
The Balance Sheet has all the information to determine the heath of a business at a specific point in time.
Did you know that the Income Statement and Statement of Cash Flows are each derived from the Balance Sheet?
The Balance Sheet is the fulcrum of the three statements.
The Big Picture
The story that your financial statements are telling you starts with the big picture.
Let us break it down…
Your Balance Sheet has three main sections:
- Assets
- Liabilities
- Equity
Assets are what you own.
These can be further segregated into Current Assets, Fixed Assets, and Investments and Intangible Assets.
Liabilities are what you owe.
They can be segregated into Current Liabilities (due within one year), and long-term liabilities.
The difference between your assets (what you own) and your liabilities (what you owe) is your equity.
A simple way to envision this – imagine all you own is a house. You paid $300,000. This is your asset, what you own. You have a mortgage of $210,000. This is your liability, what you owe.
Your equity is simply the difference between the two, or $90,000 in this example.
You sell your house for $300,000 and pay off your mortgage of $210,000 and you pocket $90,000.
Simple!
Your Income Statement is made up of two main sections – revenue (the inflows into your business), and expenses (the outflows from your business).
The difference between the two is your Net Profit.
Recap
So, now we have a Big Picture emerging – by knowing these five main sections of these two financial statements.
By looking at the Balance Sheet, we can determine what we own (assets), what we owe (liabilities), and the difference between the two (equity).
In examining the Income Statement, we can see what revenues flowed into our business, and what expenses flowed out of our business, and lastly how much profit we made.
That is the Big Picture…
Now let us get more detailed…and talk about ratios…
Ratio Analysis Deepens the Story
By looking at ratios in your business, we can start to interpret the “story of your business.”
Ratios come from the main sections of your financial statements. They tell us specific details about your business that we cannot glean from just looking at the five main sections…
By understanding exactly what they mean we can determine the overall health of our business.
From there we can make decisions to improve it.
What are the main ratios we should be looking at for most businesses?
Liquidity Ratios
Liquidity Ratios provide an early warning for a business unable to meet its current liabilities when they come due.
A current liability is defined as something due within one year. These include things like wages payable, accounts payable, taxes payable, and loan payments.
A current liability is paid with a current asset. Current assets are either cash in the bank or things that will convert to cash quickly. For example, accounts receivable collected and inventory when sold.
The current ratio is simply your current assets divided by your current liabilities.
One rule of thumb is that a current ratio of 2:1 or greater is extremely healthy.
A 2:1 current ratio means that for every $1 in current liabilities you have $2 in current assets to pay them. It means you are liquid.
Another way to think about it is that by being liquid you have enough current assets to pay your current liabilities as they become due.
By having $2 for every $1 in current liabilities means you are well covered.
Now let us look at…
Profitability Ratios
Three important profitability ratios are:
- Gross profit margin
- Net profit margin
- Return on equity.
Gross Profit Margin
Gross profit margin is the amount of profit left over after deducting your direct costs of producing or purchasing your goods and services.
Gross profit is needed to pay for your operating overhead. It needs to be high enough to cover all your overhead plus a profit.
Every industry will have a different gross profit margin percentage that will be normal in that industry.
Things that can lower your gross profit margin to a dangerous level include:
- Sales discounting
- Inefficient production costs
- Venders for your purchases that are charging too much.
- Venders delivering goods with poor quality.
Every business must measure their Gross Profit Margin by product line. In this way, you can monitor which product lines are most profitable in terms of both sales volume and the gross margin percentage.
Things that can increase your Gross Profit Margin include:
- Price increases especially when there is no loss in sales volume.
- Outsourcing manufacturing especially to a low-cost jurisdiction.
- Eliminating quality issues in either production in house or from your venders.
Next, we will look at…
Net Profit Margin
Every business needs to have overhead to run. These are indirect costs that are usually fixed in nature.
Some examples of overhead include:
- Management salaries.
- Rent.
- Insurance.
- Office Supplies.
Your Gross Profit must be enough to cover all of these fixed overhead expenses plus your profit.
Ways to increase your net profit include:
- Turn fixed expenses (as much as possible) into variable expenses.
- Find venders who will give you the same result for less money.
- Outsource as much as you are able to low-cost jurisdictions.
One of the things that happens to all businesses over time is that the fixed costs creep upward. And they also can be sticky.
By “sticky” I mean when businesses enter into longer term contracts that bind them to certain requirements that may no longer be needed.
What can happen is that you incur a fixed cost that you needed in the past, and now no longer do.
By not frequently examining your vendor relationships and agreements you may find you have fixed costs that are no longer even being used.
These can include things as expensive as office leases (more people are now working from home for instance) or software subscriptions for former employees that were not cancelled.
Now we will examine…
Return on Equity
Return on equity is expressed as a percentage of how much the business is earning in relation to its owners’ equity.
It is calculated by dividing the Net Profit by the Shareholders Equity and then multiplying this by 100 to represent it as a percentage.
A higher percentage is of course better, and a measurement of the reward being earned for the shareholders’ investment risk.
In Summary
Looking only at the larger numbers in the five main areas of your financial statements – Assets, Liabilities, Equity, Revenues, and Expenses – can be difficult to see patterns.
By expressing them as ratios, often a percentage, and understanding what they mean you can start to guide your business better.
A great accountant is someone who will interpret the numbers for you. He or she is like your co-pilot and they can help you see things that are otherwise incomprehensible.
Next week I will talk about Activity Ratios and Leverage Ratios.
Thanks for reading….
by MHolland | Apr 9, 2024 | Accounts Receivables, Business Tips, Cash Flow
Selling something, whether a product or a service, and not getting paid is brutally painful.
Sloppiness in your billing process will cost you. The ultimate cost is not getting paid.
As I have written about many times before, the cost of a bad debt is more than the actual dollar value lost.
What do I mean?
Consider a bad debt of $1,000. Did you lose only $1,000? Yes, you did lose $1,000, however…
You need to recover that $1,000, right?
Let us say that your business sells computers. On average you sell a computer for $1,000.
The computer costs you $800. You have a Gross Profit of $200 ($1,000 less $800).
To recover that $1,000 lost as a bad debt how many computers do you need to sell?
Five. Yup, gulp, five.
How so? Do the math.
5 computers sold @ $1,000 each = $5,000
The cost of those computers is 5 @ $800 = $4,000
The difference is $1,000, which is your Gross Profit.
This $1,000 bad debt has now been recovered only after selling an additional 5 computers.
So, is the bad debt just $1,000, or $5,000? The bad debt expense is $1,000, that is correct.
However, to get back to where you were before you incurred this $1,000 bad debt you must sell $5,000 worth of computers. Ouch!
9 Principles of Managing Accounts Receivable
- Develop a clear, internal accounts receivable
- Understand your new
- Credit check your new customer
- Mutually agree terms with your customer before delivering goods or services
- Issue the invoice immediately after delivery of goods or services.
- Politely chase your customer before the invoice is due to ensure they are on track for payment.
- Continue politely and persistently chasing your customer for payment if they have not paid by the due date.
- Optional – for truly troublesome customers, go ‘nuclear.’
- Thank your customer for payment as soon as possible after receiving it.
4 Cornerstones of Your Accounts Receivable Procedure
- Schedule invoice chasing time every week.
Book the time out in your calendar in advance. Never cancel it, never miss it.
- Maintain invoice communications histories.
Log all communications with every customer about every invoice. Emails, phone calls, letters, meetings – log it all
We use an innovative program with our clients called Chaser. All communication gets logged in a portal for each customer.
- Regularly assess problem invoices
For larger businesses, this may mean holding credit control meetings. For smaller businesses, this should be covered in regular finance meetings. Always complete bank reconciliation on the day of the meeting to ensure you are working with the most accurate and up to date info.
We stay on top of our bank reconciliations for all our clients daily. For clients who pay by cheque it is critically vital to deposit cheques received within a day.
- Inform the business of bad payers!
If assessing problem invoices reveals customers with poor payment trends, let other departments in your business who have touch points with them know. This may be sales reps or account managers.
4 Questions You Must Ask New Customers
- What information do you need to make payment?
- Who should I speak to in order to settle payment on this invoice?
- When do you make your payment runs?
- What are your business details for invoicing purposes?
By getting answers to these 4 questions, you will avoid:
- Getting paid late.
- Having to re-do invoices, resulting in more internal labor costs.
In Conclusion
The software we use for many of our clients is called Chaser.
Here are some of the key features of Chaser (great name, isn’t it?):
- It will send out personalized emails that fit your style of business.
- It sends these emails in a structured timed way designed to remind your client to pay.
- It will send text messages.
- You can use it to make phone calls and the history of all communication (emails, texts, phone calls) will now reside in one portal inside the Chaser software.
Thanks for reading…
**NOTE this blog post was first published by me in May 2021. I have updated it and am re-publishing it due to the critical nature of good accounts receivable management in an economically challenging time…
by MHolland | Apr 3, 2024 | Business Tips, Selling Tips
The last three weeks I have written about the first five essential secrets to build a business that works…
To recap:
- Essential Secret Number One – You Must Have a Vision
- Essential Secret Number Two – There Are Only Four Ways to Grow a Business
- Essential Secret Number Three – You Must Have a Strategic Plan of Action
- Essential Secret Number Four – What you Measure, You Can Manage
- Essential Secret Number Five – Creating a Difference
This week, I will write about…
Essential Secret Number Six – Performance Standards
The secret is that most businesses have no standards. They just do it the way they learned in the past. It is not by design.
Consequently, there is no consistent pattern of performance that a customer can expect.
As a result, they experience something different every time.
This problem gets bigger as the business grows.
The solution is to create simple performance standards – created with your Team – that you can use as a tool for performance.
Even better – share them with your customers – and let them be the judge of how well you are doing.
Performance standards make it easy to manage your business – because now you can see when they are being done or not.
Performance Standards must be written down so that people can memorize or refer to them and new employees can be trained in them.
They must be simple and easily duplicated.
They can be managed.
For example – we have a very detailed set of performance standards to answer the phone.
One of the standards is to – “answer the phone on the second ring”.
This is a Performance Standard that is based in physical reality. It either is being performed, or not being performed. You can observe it and measure it in physical reality.
It is not an emotional, feel-good motherhood statement.
When anyone is not performing to the standard, it stands out like a sore thumb…
Performance Standards are designed to:
- Create consistency in the outcomes you are committed to produce.
- Give you a tool to train new people with.
- Create a culture that is bursting with energy and awesome service.
- Be measurable.
Essential Secret Number Seven – Systems
If you’re not working on your business, you are working in it.
The secret is to work on your business and create powerful simple systems that work. A great business has a system manual – it is the blueprint for “this is how we do it here.”
After you have your systems created, outsource everything you do not like or are not good at. That means the bookkeeping, the administrative work, the emails, the phone calls, the event management…. all of it!! Leave yourself the fun, inspiring and important work.
Systems, like Performance Standards, are designed to create a way of doing things in your business. This “way of doing things should be unique and designed to create high-quality outcomes for your customers/clients in your products, services, aftermarket service, and delivery.
The system is your business. Your business is the system.
Think of a franchise, like McDonalds. When you invest in the McDonalds business franchise, what you are truly investing in is their systems.
A business that is not dependent on systems, is by default dependent on you, and on your people.
The more time you spend working IN your business the lower the value of your business.
Why?
Because potential investors will see the amount of time you are putting into your business. They want to buy a system that will give them a consistent rate of return based on their investment, not their personal time investment.
Thank you for reading…
by MHolland | Mar 28, 2024 | Business Tips, Selling Tips
The last two weeks I have written about the first three essential secrets to build a business that works…
To recap:
- Essential Secret Number One – You Must Have a Vision
- Essential Secret Number Two – There Are Only Four Ways to Grow a Business
- Essential Secret Number Three – You Must Have a Strategic Plan of Action
This week, I will write about…
Essential Secret Number Four – What you Measure, You Can Manage
A few weeks ago, I wrote about The Balanced Scorecard.
A few decades ago, business analysts thought the magical number of things to measure in a business was seven, plus or minus two.
Because of Business Dashboards you no longer must retain those seven essential numbers in your head.
We can expand those.
The things you choose to measure should not be more than three or four within four separate areas of your business:
- Marketing
- Operations
- Finance
- Human Resources
In other words, twelve to sixteen maximum.
The numbers you measure must have these characteristics:
- One key person is accountable for a number. Usually, this is a departmental manager.
- The number must motivate and result in a change of behavior and/or activities undertaken by a department.
- The number must be owned by the person responsible.
- The number must be tied to the performance evaluation of the person responsible for that number. They should be rewarded for positive performance.
- The activities related to the positive outcomes related to this number must not conflict with results in other departments, nor overall corporate objectives.
An Example of “What You Can Measure, You Can Manage.”
Most businesses want increased sales, yes?
One of the most leveraged ways to grow a business is to get existing customers to come back more often.
Yet, how many of you measure the actual transaction frequency of your customers?
First you must find the number.
In any given month you only need to find two numbers:
- The number of active
- The total number of sales transactions.
If you have one hundred customers actively buying and 1,000 transactions that month, your average transaction frequency is ten. (1,000/100).
To create an increase in your sales figures, you set a Target Number of eleven for Transaction Frequency.
What will you do to increase this number? What activities will you undertake?
Perhaps you implement loyalty cards, or start a weekly newsletter, or increase your awesome service levels with Team training.
With this new Target Number for Transaction Frequency of eleven, you now have something to measure the success of your efforts against.
Essential Secret Number Five – Creating a Difference
There is a saying: “when you have a niche you get rich, and when you don’t have a niche, life’s a b____!”
What a niche does is effectively eliminate the competition.
Because when you are specialized you have narrowed the market.
You can serve specific people, not a generalized amorphous mass.
Okay, so let us say you have a niche. The other key thing here is to start to differentiate your service in ways that wow people and sets you apart in interesting, memorable ways.
In most industries the inputs – the people you hire, the suppliers you deal with, and so on, are the same for everyone.
Everyone is dealing in a flat structure, and it is almost impossible to differentiate yourself on this basis.
The way to create a difference is to initiate awesome service standards.
The ones to build into your culture are little things that show you care.
For example, when we had an accounting practice in Victoria, BC, we ushered our clients into a small conference room and offered them a leather-bound menu offering them cappuccinos, organic snacks and teas from around the world. They loved it!!
We became known as the cappuccino accounting firm!
It set us apart, showed we cared, and let people know we were a high-class firm.
And it all cost extraordinarily little!
Thank you for reading…
by MHolland | Mar 22, 2024 | Business Tips, Selling Tips
Last week I shared the first two essential secrets of building a business that works…
Secret # 1 is Vision. Without Vision, your business perishes. It is like a vehicle or house built without any design.
Secret # 2 is that there are only four ways to grow a business. Knowing this can super charge your business by focusing on each way with separate strategies.
As a reminder, the four ways are:
Way Number 1 – Increase The Number of Customers of The Type You Want
Way Number 2 – Increase The Number of Times Your Customers Do Business with You
Way Number 3 – Increase The Amount of Money They Spend with You in Each Transaction
Way Number 4 – Increase The Efficiency and Effectiveness of Each Process in Your Business
This week I will share Secret Number 3…
Secret # 3 – You Must Have a Plan
Your plan is the roadmap of how you get from your Vision to the result you are committed to creating.
The result for most businesspeople is a business that works. A business that works without them. A business built with their skill, yet not dependent on their skill. To use a well-known cliché – you spend the time to work ON your business so that you do not need to work IN your business.
A business like this will give you the freedom, and financial independence you went into business for.
There are four pillars to your business plan.
The first is your marketing plan.
Your marketing plan must revolve around the first three ways to grow your business, mentioned above.
Each of the first three ways to grow your business requires a different strategic focus. It requires different thinking.
How to Get More Customers (Of the Type You Want)
Your marketing plan should include how do you get more customers of the type you want.
One of the least expensive, and most highly leveraged ways to get more customers of the type you want is to piggyback on a strategic partner who may have many clients/customers of the type you want.
It is not expensive because they already have the customers you want access to. Getting this “partner” to endorse your business gives you a huge competitive advantage and brings you warm leads versus cold leads.
Paying to advertise your business in the cold marketplace is extremely expensive. It often brings you price sensitive customers who are not loyal.
I will give you an example of finding a Strategic Partner in my business. I created the idea of a Fixed Fee, all inclusive fee for businesses who needed a Financial Controller.
They were not getting the results they desired by hiring in-house staff.
I took my idea to Canada’s biggest banks. I did this because:
- Banks often saw the poor financial reports of their clients to whom they loaned money.
- The banks depended on impeccable financial reports for their monthly loan evaluations.
- They felt good about saving their clients money with our service and getting them better results.
The banks referred to us our first clients. Because their bank referred them to us, the “sales process” was minimal. They were already sold!
After those first successes I then spent most of my marketing time building relationships with banks. I went for lunches, did seminars, and called them.
How to Get Your Customers to Come Back More Often
The second part of your marketing plan must focus on getting existing customers to come more often.
Now the focus is not on winning over new customers; it is on loyalty. And in business, loyalty is expressed by how often your customers do business with you.
You plan can include:
- Loyalty cards (yes, they work!)
- Newsletters and other points of contact to get your customers to come back more often.
- Events and special occasions to bring your customers back more frequently.
- New products and services.
This is one of the most highly leveraged ways to grow your business. In fact, if you have a large customer base and your customers, on average, buy from you, let us say three times a quarter. And you increase that to 3.5 times, your bottom-line growth can be explosive!
It is also the least expensive way to grow a business because you are marketing to existing customers.
How to Increase Your Average Sale
The third part of your marketing plan must include how you increase the amount of money your customers spend when “you give change at the till.”
Your plan can include things like:
- Bundling products and services into packages.
- Scripts (“would you like a muffin with your coffee?”) work. Identify what they are for your unique business and build them into your plan.
- Adding more products and services.
As in way number two above, this focus can be very inexpensive for the same reasons. You are marketing to existing customers.
Creating scripts that work cost you only some time. Training your Team is inexpensive, as you already have a Team to train!
Your Operations Plan
You need a plan on how you deliver the best results that will wow your customers.
Plan for systems and use technology for them.
In our company all our systems are in the cloud and not on pieces of paper.
Your Operations Plan should include:
- Performance Standards for each aspect of your operations.
- Systems on how things are done.
- A flow-chart of operations including potential bottlenecks, and your production/service capacity.
- How to outsource functions for higher quality and less costly outcomes.
- Your Organizational Chart.
Your Financial Plan
Here you need a map on how you will get from where you are now to where you want to be in three years according to your Vision Statement…
Your Financial Plan/Forecast must include:
- Quarterly and Annual Budget for your next fiscal year.
- Three-year Forecast.
- Breakdown of variable cost of goods sold/services performed.
- A detailed Fixed Cost budget of your overhead.
- Budgeted profit for which you are aiming.
- The sales required.
Most accounting software packages include a budgeting feature.
For our clients we use a sophisticated software for Forecasting. We review monthly and update quarterly as required.
Your Human Resources Plan
Here you need to think about what functions can be outsourced and what do you absolutely need to do in-house.
Having to let go of employees is extremely expensive, as the longer a poor performing employee is kept on the higher the cost of letting them go. This is because of employment laws around severance pay.
The monthly costs for employees are extremely high with all the extra burdens of Canada Pension, social security, workers compensation, employment insurance and medical benefits.
Hire for attitude and train for skill.
With great systems and people hired with a great attitude (something that cannot be trained) your business will work better than only looking to hire great people.
Turnover is costly so hire carefully.
Ensure your plan includes a probationary period so you can let people go without too much expense.
Next week I will write about Secret #4 – What You can Measure You can Manage.
Thank you for reading…
by MHolland | Mar 12, 2024 | Business Tips, Systems
Over the next 3 weeks I will be sharing with you 7 Essential Secrets to building a business that works…
Works for who?
Works for you, sometimes the least focused on person(s) in a business. You do not need to be a slave to your business. With focused, intentional design your business nightmare can be transformed into a dream.
These “secrets” individually are not really that secret. However, few businesses put these elements together as a collective whole, and that is a secret.
This week I am going to write about Secret #1 and Secret #2.
Let us get started…
Secret #1 – Vision
The Problem here is most people start building a business without any vision.
They just start making it up and wonder why at the end of it what they have is not working (for them).
In other words, it does not give them the things they went into business for in the first place.
What is it that people go into business for in the first place?
What we have discovered is that most people go into business to have freedom, financial independence, control of their destiny, and peace of mind.
Yet, is that what you think most businesspeople end up with?
Not really, right?
A Vision gives you the direction you are going in.
A Vision needs to be created in a way that has these elements:
- Time frame (usually 3 years).
- Description of your niche and the services you provide that niche.
- Has a strong emotional wording that inspires you every time you say it or even think about it. It gets you out of bed in the morning.
- Lastly, it has a dollar figure in it.
For example, if we decided right now to go on a road trip together and did not discuss where, when, and how we are going to get there (and we do not know where we are going anyway)– how far do you think we will get?
Or where do you think we would end up?
It is ludicrous to even imagine what that would be like, isn’t it?
The same if we were going to build a house and just grab some tools, and start building and hope that when it is all done, we have a beautiful, safe home to live in.
Again, we all know how absurd that is, and yet that is exactly what people do when they start a business. They have some vague sense of what they want, and the industry they are in, and they just start acting.
Why do you think in business that we approach things like that?
It is because we do not know that a business has a design (or needs to have a design) in the same way that a house does.
In fact, it is a bit worse than that! It goes like this – most people think that because they are good at the technical aspects of their trade, or profession or craft that means they are automatically good at that kind of business.
The problem is that a business operates along distinct design elements separate from the work of the business. For example, Ray Kroc, the founder of McDonalds never knew how to (or did not ever) serve one single hamburger.
His vision was a system that could be replicated repeatedly. This is what I mean by an elegantly designed business.
Secret #2 – There Are Only 4 Ways to Grow Your Business
If we were to start a brainstorming session and write down on white boards each way, we could think to grow a business how many distinct ways do you think we could produce?
If we had enough time, we could list hundreds if not thousands of different ideas and strategies to grow a business, yes?
Well, the problem is, it gets so overwhelming, with so many ideas and we have no way of knowing or measuring the actual cost and leverage of each way!
Where do you begin? How do you know what will work?
Well, the answer is – and this is great news – there are only 4 ways to grow your business!
And each idea we would have listed above will fit inside one of these 4 ways to grow.
We all intuitively know what they are!
Let me share with you…
Way Number 1 – Increase The Number of Customers of The Type You Want
Way Number 2 – Increase The Number of Times Your Customers Do Business with You
Way Number 3 – Increase The Amount of Money They Spend with You in Each Transaction
Way Number 4 – Increase The Efficiency and Effectiveness of Each Process in Your Business
And the exciting part of this way of thinking with the 4 Ways to Grow is that we can measure the impact on your profits for each way, and discover which way is the most leveraged.
Here is a simple way to break this down…
How Are the 4 Ways Measured?
Your total sales are composed of the first 3 ways to grow your business.
Your total customers X the number of times they buy from you on average X the average sale per transaction = your total sales.
When you work at increasing (even in small increments) all 3 ways at once, the compounding effect can be extraordinary.
To measure way number 4, you take your total expenses and divided it by the number of transactions to give you the cost per transaction.
When you lower the cost per transaction without sacrificing quality, service, or on-time delivery, you will be more efficient.
This is way number 4.
Thank you for reading…
