Last time we looked at nine warning signs that your business might need a transformation or major tune-up. This time we’ll talk about how to get started, with four improvements in management information and financial reporting. In short, to make better decisions with better data, you need to:
1. Correct errors in your financial data
2. Organize your chart of accounts to improve management understanding
3. Correct the data for product costing. Determine a pricing strategy
4. Create and maintain an up-to-date plan for cash and funding
Let’s look at each job.
1. Clean up your financial data. It’s obvious that you can’t understand the true performance of your business without reliable data – but it’s amazing how many businesses are running with bad numbers in their financial reporting. There are four ways to find incorrect or corrupt data:
- System notifications. This seems obvious, but if you are receiving system notifications like “Balance Sheet out of balance,” you need to fix the system errors.
- Corrupt files. Most accounting systems include a process for verifying the file structure, and rebuilding the data if a problem is found. This is a good time to recommend that you BACKUP your files before you push the button!
- Negative asset balances. If you have asset accounts with negative balances, this is a sure sign of missing transactions.
- Negative liability accounts. These are very common. It usually means that payments were made and recorded to a liability account without a corresponding expense entry. The result is that your profits will be overstated.
2. Organize your chart of accounts to improve management understanding. This is a widespread problem, and it’s easy to understand the cause. Your chart of accounts was probably developed early in the evolution of your business.
Your CPA may be happy if your data is organized for tax returns; But as CEO, you want management information! You need to know the income (and profitability) of key business segments: product lines, geographic divisions, or business units. For you to be able to get useful reports – and make correct management decisions – your chart of accounts needs to be properly organized.
3. Get accurate information about your product costs. I can just about guarantee that one of your products or services is losing money. Do you know which one it is? You spend a lot of time establishing a pricing strategy, but it can backfire if you don’t know your true costs. If your books aren’t organized so you can easily see your profitability by product line – and make sound pricing decisions – you may be leaving cash on the table. (There are some good reasons for selling a product at a loss – you can probably name at least three – but you should do so knowingly.)
4. Develop a plan for cash and funding, and keep it up-to-date. To be successful, your business must be profitable. But that’s not enough. The road to ruin is littered with profitable businesses that ran out of cash. Your business must be cash-positive (or you have to plan for funding your cash-negative operation). Start by really understanding your cash cycle and work to optimize it. Then develop a useful cash plan and a system to maintain it.
If you recognize some of these problems in your business, you need to make some changes. Where do you begin? How much should you invest? And how can you do it so your people embrace it and make it sustainable? That’s what we’ll consider next time.
Dedicated to your success, Steve Milan
Steve Milan is a founding partner of FUSE, and has a deep background in manufacturing environments. His specialties include using financial reporting and operations data to drive performance improvement across the organization. Reach Steve at [email protected] or 704-301-7777.