3 Major mistakes business owners make with financial reporting

 

“Stay on top of your finances. Don’t leave that up to others”

Leif Garrett – USA singer and TV personality

Many business owners I meet tell me that their external accountants do their monthly accounts. In fact, one owner had his external accountant and his book keeper on site each week, and another waited 3 months to get his monthly profit and loss statement (P&L) which he didn’t look at anyway.

Did they provide financial reports that helped these owners manage their businesses?

This depends on the type of reports being created.

However, the answer is almost always………NO

What is usually provided is a service to input financial data and/or accounting services required for taxation purposes, that is to meet compliance requirements. The owners would then be given a profit and loss (P&L) statement, showing consolidated revenue less total costs to determine the profit.

Why is this a problem?

This is a problem because these P&Ls are not an operational P&Ls. This brings me to one of my favourite issues with managing businesses. The financial results that are being currently reported do not help in operating the business.

In my experience, there are 3 mistakes business owners make in financial reporting:

  1. Incorrectly categorised costs

Many businesses do not understand the difference between fixed, variable and overhead costs. Furthermore, external accountants generally do not categorise those costs as this is not required for compliance or taxation purposes. For example, it is important to know what your direct or variable costs are which vary with output or sales revenue. By not categorising costs correctly and having them in the correct section of the accounts, you cannot determine your gross margin, sometimes called your cost of goods sold (COGS) and net margin …….which leads to the next mistake…..

  1. Reports do not reflect operational needs

When costs and revenue are not placed in correct place, they will not help operationally. By consolidating costs rather than categorising them, a manager or business owner cannot easily determine which costs increase and decrease with changes in sales, or what their overheads are for operating the business.  It is essential to understand and identify each of the different costs and how they vary with activity. Often a single business has various components or different activities that make up the total business. In one of the examples above, the business was actually three different businesses, second hand vehicle sales, vehicle servicing and second-hand motor vehicle parts sales. This business owner’s revenues were consolidated and he did not know which activity was profitable and which was not…………..which leads to the next mistake…..

  1. Not knowing which parts of the business are profitable

So, did the business owner know if selling second had cars was profitable or whether it was worthwhile to continue to provide motor vehicle servicing?

No.

Therefore, the first step is to identify the different business activities. Once this is done, divide the revenue by activity and then assign to the different business units. For example, second hand car sales, spare parts sales and motor vehicle servicing.

The next step is to categorise the costs by type, variable or direct costs, indirect costs and overheads. Then assign these costs into business units. Overheads will be assigned to the consolidated business, with the P&L looking like this:

By reviewing the P&L, the business owner can see that Spare Parts is losing money and vehicle servicing has a Gross Margin of 63% and is the most profitable with a Net Margin of 48%. Furthermore, Overheads are 18% of Revenue, which would seem high and may warrant further investigation. As Spare Parts is losing $25,000 per year, possible managerial actions could be to increase prices or cease selling Spare Parts as a business activity which would result in an additional $25,000 in profit.

These are examples of what a good management or operations P&L looks like and how managers and business owners can make informed decisions.

Remember there are 3 mistakes in financial reporting:

  • Costs are incorrectly categorised
  • Reports do not reflect operational needs
  • Not knowing which parts of the business are profitable

As a manager or business owner is your operational P&L provided in a format you can use to improve your business’ performance?

 

 

5 Ways to Invest in Yourself

Guest Blog by Kym Wallis

An investment in yourself is the best thing you can do to advance personally and professionally. Whether your goal is to climb up the corporate ladder or build a successful startup, you need to develop certain skills first.

Make no mistake though: Working on yourself isn’t easy. There will be numerous challenges standing in your way. But when you take the steps to improve your performance and consistently put in the effort, new opportunities will open up to you.

Here we’ll look at some of the best ways to invest in yourself.

1. Set Goals

Many people work hard but still seem to be stuck at the same level either personally or professionally. A key reason is simply because they haven’t set goals.

Why is setting goals so important?

Because a goal gives you focus. It helps you better organise your time and resources to accomplish a worthy objective. Goals let you see clear progress in what may have been thought of as unattainable. Even if you have no idea how to accomplish a certain goal, just the act of putting it down on paper gives you a focal point to start brainstorming the first steps.

Set personal and business goals for yourself. Your goals should be SMART which stands for Specific, Measurable, Achievable, Realistic, and Timely. Writing your goals down in this manner provides a strong foundation for seeing things through.

2. Read More Books

What do some of the most successful entrepreneurs have in common?

They’re voracious readers.

Successful entrepreneurs like Bill Gates read 50 books a year. “Every book teaches me something new or helps me see things differently,” says Gates. “Reading fuels a sense of curiosity about the world, which I think helped drive me forward in my career.”

He’s not alone either. Other entrepreneurs like Elon Musk and Mark Zuckerberg have made reading a daily habit for several reasons. It provides mental stimulation and exposes you to new ideas. Everything you read also builds up like compound interest.

Books like ‘Good to Great’ and ‘The 7 Habits of Highly Effective People’ are great starting points. But don’t ignore fiction books either. Elon Musk credits the Lord of the Rings with shaping his vision of his future self.

Making reading a daily habit is one of the best ways to invest in yourself.

3. Take Care of Your Health

Data from the World Health Organization estimates that 80% of the deaths arising from non-communicable diseases include cardiovascular diseases, respiratory diseases, cancer and diabetes – most of which are preventable with a healthy lifestyle and diet. By taking better care of your health you greatly reduce the risk of being diagnosed with such diseases.

Make regular exercise part of your daily routine and focus on eating healthier. Replace sugary sodas with water and incorporate more vegetables into your diet. Just these two alone will get you on the right track towards a healthier lifestyle, resulting in fewer health problems later on.

Although there are exceptions, you can’t hope to achieve anything meaningful if you’re constantly sick or bedridden. Make the choice to invest in yourself by making better decisions about your health.

4. Invest in a Personal Coach

Even the most successful CEOs work with coaches to bring more insight and new perspectives for the visions and goals of their organisation. If you own a business or are thinking of starting one, a personal coach can assist with setting up your business and bringing to light any common pitfalls people face. And even if you don’t have a business, a personal coach can help you focus on your career goals and show you how to be more effective at work.

You don’t have to necessarily get a coach to improve yourself and work on your ambitions. If one of your goals is to be more financially stable, you can hire a financial advisor to look over your finances. Just remember that a coach is there to help you create and implement an action plan. Their success depends on your success.

Coaches can be expensive but it’s an investment that aims to pay for itself.

5. Learn a New Skill

More employers are now looking for employees with a diverse set of skills. Learning a new skill not only pushes your career prospects further but shows that you are a valuable asset willing to invest in yourself.

You don’t need to enroll in classes or spend a lot of money either. There are plenty of free resources online such as YouTube and Khan Academy that teach valuable skills you can implement in your job. Talent doesn’t just magically appear overnight. You have to actively put in the time to build your skills to overcome hurdles and accomplish your goals. Set aside time in your schedule and make a commitment to learn a new skill.

References

  1. https://www.inc.com/carmine-gallo/bill-gates-other-billionaires-say-this-1-habit-is-secret-to-their-sucess.html
  2. https://5-dimensionz.com.au/2018/05/21/are-you-a-smart-manager/
  3. https://5-dimensionz.com.au/2016/12/19/reading-is-not-just-for-christmas/
  4. https://www.who.int/news-room/fact-sheets/detail/noncommunicable-diseases
  5. https://5-dimensionz.com.au/2014/01/23/networking/

Author’s Bio

Kym Wallis, the founding director of Higher Ranking has over 15 years of advertising sales, digital strategy, and business development experience. He is currently working as Digital Adviser for Konnect Salon Software. Kym has several other blogs on this website.

 

New Year’s Resolutions for 2018 for you and our business…..

“We adopted a strategy that required our being smart and not too smart at that, only a very few times. Indeed, we now settle for one good idea a year”

Warren Buffett – business magnate, investor, and philanthropist.

It’s the new year and the festive season is over.

The start of the calendar year is a time for reflection, recharging your batteries and planing for the year ahead.

Was 2017 a challenging year for you?

Did you achieve your professional or business goals?

If not, why not?

Many of us make long lists of New Year’s resolutions that are unfortunately never fulfilled. Maybe we had too many resolutions, or they were too difficult or we were just plain lazy. One study found that less than 10% of New Year’s resolutions are never completed or considered successful.

However, as business owners or managers we are obliged do better and are expected to do better!

For example, as a manager or business owner, you will probably have a couple of new year’s resolutions about being more productive, expanding or improving your business.

Are they the right goals?

Will they make a REAL difference and become habits and a mindset so that you succeed now, and not just for the next 365 days?

As Warren Buffet suggests in the quote above, making a few significant right decisions will make a real difference. With New Year’s resolutions, set the right resolutions, limit the number and keep them simple – the KISS principle: keep it simple stupid. Using this principle, they are more likely to be effective and result in changing your habits.

Here are three resolutions you could consider for 2018 with three aims of being positive and habit forming, changing your mindset and having a positive impact on you, your business and your team.

Resolution 1: Ask More Questions

How often do you meet people and find they rarely ask questions?

Asking questions is not a sign of weakness. Questions are a tool to drastically improve your knowledge, resources, and even your network. Put your ego aside and ask questions. You will be surprised at what you will learn. I recently attended a training course and met some new professional consultants. By asking questions I found some surprising links with people we knew and experiences they had that could be useful in the future.

Asking questions is one of the most valuable skills a manager can have, whether it’s asking for advice, asking for feedback, or simply asking for help. It also demonstrates empathy and builds understanding. Great leaders do not have all the answers, however they usually ask the right questions.

Resolution 2: Work On My Business, Not Just In It

Most businesses start with a technician wanting to work for themselves because they have technical skills. (refer to blog on The E-Myth ) However, as the business grows there is a tendency to work on the activities you know and enjoy doing, that is working in the business not on the business.

To build a successful team or business, you need to learn how to create an entity that can exist without you. Leading rather than doing. Simply working harder, or working longer hours is unlikely to improve your business as significantly as required or desired. Whilst you may know your business better than anyone else, or are the most efficient person in the business, the time you spend doing jobs that other people could be doing is time not spent running and improving your business.

I learnt this the hard way in my former logistics business. I was spending too much time calculating the productivity of the different sections of the business by employee and customer – working in the business. It dawned on me that someone else could prepare the productivity reports for me. With the completed reports, I could then concentrate on the areas that needed action plus of course highlight and praise good performance – working on the business.

So, force yourself to look at your organisation objectively and determine what needs to occur so you can achieve your goals.

Resolution 3: Do more Networking

Networking is one of the most valuable tools you can have in your manager’s tool box. Knowing the right person provides opportunities to grow your business, from new markets or products to finding yourself a mentor.  Those managers or business owners who surround themselves with a diverse, dynamic, long standing and large network increase their likelihood of success.

I was able to successfully find a prospective buyer for our logistics business through a networking contact (Networking) that went back over 25 years. However, networking needs to be approached with the mindset of maintaining a relationship and helping others. You are likely to have contacts, skills and experience that can assist others and in turn, they are more likely to help you. Remember, people do not like being used.

You are far more likely to develop relationships when you are not selling or asking for something. Networks are support systems. You are more likely to gain assistance through your network when you require assistance.

So, force yourself to make phone calls, catch up for coffee or join an organisation, whether professional or a service club. You will be surprised how rewarding it will be.

It’s not long to the New Year…………

Have you started thinking about your New Year’s resolutions?

Will these New Year’s resolutions meet the KISS principle?

Will they be habit forming, change your mindset and have a positive impact on your team or business?

………….and finally good planning and action for the coming year.

Above the Line and Below the Line Thinking…

“We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses.”
― Abraham Lincoln

Continuing on from my last blog on 24th August, 2014 (https://5-dimensionz.com.au/2014/08/24/never-never-say-these-things/) highlighting the difference between excuses and reasons and making sure you are not the road block, we have the concept of above and below the line thinking.

This is a very powerful concept – “The Line” is the parallel that divides our character and represents responsibility. Responsibility is a very important word. It is a powerful life skill that puts into practice the act of ownership; taking responsibility and being accountable for your actions.

Acting below the line our lives become circumstance-driven and include the characteristics of laying blame; denial and making excuses.

Are you a victor or victim?

Laying blame is far too common in organisations and businesses; whether it is the CEO or others. It shows that they are not willing to be accountable or responsible for their actions. Excuses don’t solve the issues either, nor promote responsibility. They usually cause frustration.

With denial we are committing yet another below the line action “I didn’t do it.” This obviously ineffective response can create certain frustration in others and make us appear unreliable and dishonest.

Yes, victims let things happen to them; do not take control; are pessimistic; find reasons why not and always appear tired and stressed.

By choosing to act above the line  we are using response-ability (that is taking responsibility for your performance and showing you have the ability to be responsible). It is a powerful skill. This can be defined as having the ability to respond (that is be pro-active). With response-ability comes increasing choices and freedoms that we may have never had before.

By living above the line, you take responsibility for your own life, business or career. You begin to have greater control because you stop blaming things outside yourself for your current situation. I can remember being in a business where a manager always came up with excuses about poor business performance whilst continuing to deny there was a problem. This was extremely frustrating for me. It began to affect my work performance and emotional state. I was blaming him rather than taking ownership for my performance. I decided to take responsibility for my performance and the business performance and this filtered down the organisation to others, making them take responsibility for their sections……..and unsurprising performance improved and so did workplace morale.

Responsibility is the ability to respond to the events that happen in our lives. When you sit back and accept things that happen to you, you are allowing the circumstances of life to control you rather than taking control of what circumstances come in and out of your life. When you take action, you make life happen for you…………not to you!

Measuring

Welcome. This is my first Blog on the new website. I would welcome any comments and please feel free to follow and keep in touch.

“What gets measured gets done” – Peter Drucker

This is a great quote for business or life, if you want to achieve your objectives or improve performance. As the saying goes “If you can’t measure it, you can’t manage it”.

In business this means all areas from people, processes to performance. However in business it is important to identify the main ‘things’ that will ensure your business’ success. These are often called Key Performance Indicators – KPIs for those that wish to use 3 letter acronyms. I shy away from using so called management jargon as it is often pretentious, arrogant and only serves to complicate simple processes, ideas and concepts.

The identification of KPIs that drive the success of your business should not exceed 3 to 5 measures or benchmarks otherwise it becomes too complicated and difficult to maintain. KPIs need to be SMART :

  1. SPECIFIC – must be clear and concise so that everybody understands it
  2. MEASURABLE – must be based on performance or behaviour that can be measured objectively
  3. ACHEIVABLE – must be attainable and what is required
  4. REALISTIC – must be a goal that can be realistically achieved and should represent significant progress from the status quo
  5. TIMELY – a goal must have time line to be achieved (e.g. by a certain date)

If we use a transport business for example, a KPI could be the number of kilometres travelled per truck per week to ensure an acceptable return on investment. It could look something like this :

By 30th June, the average kilometres travelled per week must be 8,000 kilometres per week. Currently the average is 5,000 kilometres per week.

  1. SPECIFIC – 8,000 kilometres per week
  2. MEASURABLE – kilometres per week is measurable objectively on a weekly basis
  3. ACHEIVABLE – 8,000 kilometres per week is achievable if the truck works 2 shifts per day and/or 6 days per week
  4. REALISTIC – it is realistic and is greater than the status quo of 5,000 kilometres per week
  5. TIMELY – must be achieved by 30th June

By implementing this KPI, performance can be measured on a weekly basis and compared week by week. The weekly KPI can be used to implement a plan of action to achieve the required objectives.

In conclusion, using SMART indicators your business objectives can be achieved providing you act on the KPIs to ensure you meet the required objectives. With no objective measurement system in place and no management then the status quo will remain and more than likely performance will deteriorate. So determine the key drivers of your business, start measuring them so you can improve your business’ performance.