Tuesday, May 11, 2010
Realize Your Vision- Get Exceptional Results from your Business
I subscribe to many "business" newsletters regarding different aspects of making your business more successful. Below is a piece by C. David Stephenson of CDS Partners regarding the importance of understanding the fundamentals of managerial accounting. I remember hating managerial accounting in Business School, but it is key to the financial success of any business.
Many business owners rely on past financial information, not current results, when they are planning strategies to achieve improved profits in the future.
For instance, one of my recent clients, Richard, owns a custom cabinet manufacturing and installation company. Although he was well trained in the technical aspects of his products and services, having worked as a tradesman, he continuously struggled with cash flow. Sales revenues were $2.7 mm annually and declining with less than 2.0% net profit before taxes.
For financial support, he relied on his bookkeeper and his CPA. With his bookkeeper he monitored bank balances, receivables, payables, credit cards, and loan payments almost daily. Every month, he and his CPA checked the accuracy of historical reports, adjustments, government payments, and taxes.
Richard blamed his company’s serious situation on conditions he could not control, such as the slipping economy, stiff competition, seasonal variations, and lack of salesforce motivation.
He pushed his salespeople to increase sales volume. Despite their increased efforts, revenue and profit continued to decline. He decided to request help from our company.
When we intervened to initiate a turnaround, we gave Richard and his key people basic training in the fundamentals of managerial accounting.
We’ll give you a brief overview of it here to illustrate Richard’s story. More details will follow in future News Briefs.
Through our training, Richard learned to define the product mix in his business and to measure gross margins, overhead and net profit in each product mix area. Using this knowledge, available in readily available records, he and his group applied new methods to manage, control and improve business processes.
With these new processes in place, financial sales and cost trends became visible in historical records, present results, and future financial projections. Proper measurements and metrics flowed from the accounting system, making management decisions and planning easier. The company introduced numerous financial tools to guide step-by step implementation.
One year after implementing these changes, Richard’s company achieved sales revenues of $3.1mm with net profit of 6%, a gain of $124,000 in net profit before taxes.
These enhanced profits were a direct result of the basic changes Richard made in how management understood and applied basic managerial accounting methods.
After 10 years of coaching and consulting for over 100 clients, I am still surprised to find that most business owners and their key people have a decided lack of knowledge of financial controls and measurement processes.
When I begin an engagement, I find that overall knowledge and understanding of managerial accounting is very limited. The owner tends to focus on historical accounting information, not on information which provides the roadmap to move his business forward. As a result, he fails to take advantage of readily available information that will make more money for his business.
If your business suffers from the same issues that held Richard back and you want to improve profits, you are not alone.
Over the next several weeks, I will show you how to get exceptional results from your business in my upcoming News Briefs and Blogs.
These tips will give you financial tools and methodologies you can put into practice right away to achieve the profit improvements you need to survive and prosper in today’s business climate.