Many owners of small to medium sized businesses tend to direct their attention on daily operations and allow themselves to get ‘caught in the weeds’ of running a business. Instead, an owner should be focusing on growing their customer base, visiting existing customers to solicit feedback and concerns, and most importantly planning for tomorrow. How can you plan for tomorrow when you only have enough time to worry about today?
We cannot solve the time management issue for you, the business owner. You must relinquish control and allow your team to steer the ship. Yes, that means you have to trust that they have your best interests as their number one priority. Easy to say, hard to achieve. Here are some steps on how you can configure your finance & operations so that you only need a weekly update to feel comfortable on its performance.
Step 1: Configure
Record Revenue and COGS (Cost of Goods Sold) transactions on a daily basis where it can be categorized by customer, parent customer, product/service type, associate/team, geographical region, or any other number or relevant sub-categories. The goal is to be able to extrapolate your revenue/COGS sources to understand which segments of your business are most profitable and which are the least. As an example, if you had a customer contract coming up for renewal, before you entered into negotiations you would want to know the impact that customer’s business had on your bottom line. Revenue should be any payment or expected payment for services rendered or products sold, where as COGS would consist of any cost required to perform services or sell products, and should be split between variable costs and fixed costs. Revenue less variable costs is known as Contribution Profit Margin, whereas revenue less COGS is known as Gross Profit Margin, both important in understanding the performance of your revenue generating associates and teams. Most other expenses fall under Operating Expenses and do not directly impact the revenue generation for your business. Correctly categorizing and configuring these expenses and General Ledger accounts is vital to achieving a clear picture of your financial performance.
Step 2: Accuracy
Accounting software is only as helpful as the data that is being input into the system. It is incredibly important that every associate in the business understands that even the smallest mistake can have resounding and costly affects on your business performance. Each associate must be thoroughly trained for their position with mandatory annual refreshers to assure they have a tenuous grasp on your CRM (Customer Relationship Management) or ERP (Enterprise Resource Planning) software. It is very easy for associates under pressure to omit information or rush through a customer interaction, as the business owner it is your job to make sure your team understands there is always enough time to do it right the first time.
Step 3: Benchmark
Look at your performance over the past month, quarter, year, and last 3 years. Comparing your recent performance to prior periods is a great way to observe growth and efficiency improvements. This is typically the best way to quickly catch a problem before it grows out of control. If you know that historically your variable costs have never accounted for more than 40% of your revenue, yet last month they were at 60% this is a red-flag to investigate further. Hopefully it is simply a data entry or accounting error, but if it is something more that can be used to make quick business decisions to mitigate any further losses.
Step 4: Projections
Using your benchmark financial data, recent financial performance, and anticipated revenue and/or expense growth create a revenue forecast and expense budget for the upcoming fiscal year. Set achievable goals for growth and reasonable expense reductions for efficiency improvements. Use your projections as a template for your performance, compare your actual results to the plan to see how well you performed but also the accuracy of your forecasting. Understand that performance that far exceeds the plan and benchmark values isn’t likely to be repeated in the coming period and that future projections should not be based solely on the prior year’s actual performance. It is more realistic to augment your projections for the coming year based off of the prior years projected figures.
Step 5: Create a Team of Trusted Professionals
As a business owner sometimes you may feel as if you are alone in this game. Our management consulting firm is only one piece of the larger picture, you should develop relationships with tax accountants, IT/cyber-security professionals, a business law-firm, non-competing industry experts, external industry experts, business mentors, just to name a few. Then make sure you hire people with the knowledge, skills, and abilities that you can trust to run your business for you.
Step 6: Support, Be Visible, Be Hands-Off
This final step is arguably the most important for your success as well as your freedom from the daily grind. You must support the leadership team that is running your business. If they do not have your full support your associates will see that and your leadership team will lose any authority and respect they once had. Any disagreements you have with decisions they made should be discussed in private. You should remain visible in your organization but refrain from ‘helping’ with operations in any way. The best way you can help is by redirecting your associates to their supervisor. Make it clear that they can always come to you for help, but your first question should be “what did your supervisor have to say about this?” You have a great team and you care deeply about your business, empower your associates to be autonomous and monitor your business performance from the weekly operations reports, monthly consolidated financial statements, and quarterly/annual reports from your leadership team.