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?

 

 

10 Easy Ways to Improve Your Productivity

This is the third blog by an external guest contributor, this time the blog is provided by Integral Media (https://www.integralmedia.com.au/) We hope you enjoy it and find it useful. It’s a great time of the year to give due consideration to increasing your productivity. Happy New Year and all the best for 2019.

Boosting productivity can be difficult for many of us but there are ways and means. There is an art to it, however. The key is working smarter rather than harder and longer. It’s how you use the hours you have at your disposal that increases your productivity. For instance, it’s a good idea to take regular breaks, which helps your concentration. So don’t slog away for hours on end, it will only cause fatigue and lack of focus. Try these simple tips instead:

  1.  Say No to Notifications

Notifications are a major reason people fall behind in their productivity. The beeps and jangles will take your focus off your task, so the advice is switch notifications off, permanently if possible. If you can bear to do it, remove Facebook, Twitter and all the other social media apps from your phone. You’ll feel a sense of freedom and see the difference in your productivity levels. Also, if you’re on a deadline and must concentrate, close your emails and put the phone in Aircraft or ‘do not disturb’ mode. You probably won’t miss anything vital by going off-grid for an hour or so.

  1. Get Your Thoughts on Paper

It isn’t easy to get your thoughts organised, especially when you’re busy, but the more ideas you have banging around in your head the more difficult it is to concentrate on what’s happening now. If you don’t write your thoughts or ideas down, it blocks your creativity. Get into the habit of writing it down, even though you might toss an idea out later. No matter what program you use, or if you simply have a ‘to-do’ list, (which you need as well) getting your ideas on paper means your next great idea won’t get lost in the maelstrom in your brain. Knowing your ideas are safe means you can deal with what’s in front of you and you won’t make the mistake of trying to multitask. Research (1) shows multitasking lessens productivity by up to 40 per cent.

  1. Hydrate

If you’re even slightly dehydrated you won’t be able to concentrate properly, and if you’re very dehydrated you might feel dizzy or nauseated, or have a headache which doesn’t help with your productivity. How much water you need in a day will depend on your age, any medications (especially diuretics) your diet, daily environment and level of activity. Some need more than the recommended eight drinks of water a day and some need less.

  1. Eat Healthily

Don’t race out at lunchtime and get greasy takeaway, or eat cakes and sweets at morning tea. It’s hard, but you should think about the fuel you’re putting into your body every day if you want to feel good and be productive. Make your own work lunches. You’ll feel so much better and save money.

  1. Get Regular Exercise

Your mind and body are a double act; they work together, and if your body is not functioning at an optimal level, it will affect your brain and the stress will, in turn, affect your body. It’s a vicious cycle. The answer is exercise. The latest findings suggest that exercise rather than painkillers are better for treating chronic back pain, for instance, but it takes time and you must start slowly. A few stretches during your break may ease painful joints.

  1. Be a Reader

Most of those who inhabit the lofty realms of business success have one thing in common: they read, and they read avidly. Reading provides you with further education, relaxation and increased creativity. Reading also exercises your brain muscle, helps you create new images and teaches you new words to increase your vocabulary and it all boils down to better productivity.

  1. Do Something Different

If you become deeply involved in your work and exclude everything else it will become stultifying. You’ll stagnate for lack of variety, relaxation and fun. Spending day after day on the same treadmill will make your work a bore, even if the task is one that you love. You need space, a work-life balance, a change of pace and a break from your major goal. Being balanced means you’ll avoid tunnel vision, and your brain will have space and time to come up with new ideas. Some ways to relax and take a break include:

  • Walking the dog
  • Doing some yoga
  • Baking a meal
  • Lazing in an Epsom salts and lavender oil bath
  • Going to a Zumba class
  • Having a manicure
  • Gaming
  1. Habits: Make Minor Changes

Nobody is really sure how long it takes to form a habit, and it’s probably different for each of us. But forming good habits is important, even Aristotle thought so (2). Habits and routines are fundamental to consistency, which is fundamental to achieving goals. Making small changes rather than dramatic ones cements an action or reaction into an automatic response or habit. So start small and add to your goal gradually.

  1. Keep Track of Progress

It’s so easy to forget where you’re headed, especially if your project is a long-term one. By tracking your progress you can appreciate how the smaller tasks add up. The truth is, talent doesn’t get you far in life. It’s what you do with it. It’s the hard slog, showing up for work every day, even if things look grim in other areas of your life and you just want to give up. Tackle the smaller tasks first, then you’ll feel as if you’re getting things done, which you will be. Be tenacious and determined, follow all the above tips and always tackle the harder tasks first thing in the morning. The longer you keep at it in a healthy way to sooner your productivity will grow.

  1. Healthy Sleep

Try some sleep hygiene – it involves more than just cleaning your teeth – it’s a routine that can begin an hour before you actually hop into bed. You could turn your phone off, read a book or take a hot shower. Your routine should include things that don’t stimulate so no alcohol or coffee. The more you follow your routine the sooner your body will become accustomed to knowing it’s a lead-up to sleep. Sleep hygiene helps you get a good night’s sleep so you can wake up energised and enthusiastic, and it will show in your productivity.

 

5-Dimensionz is a Melbourne-based company working with business owners and company directors to improve their performance and profits. Contact us for a free no-obligation confidential business review. We will discuss your vision and concerns and identify opportunities to lift the performance of your business.  Call us on 0488 480 402 or email david@5-dimensionz.com.au.

 

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References:

 

  1. http://routineexcellence.com/psychology-of-habits-form-habits-m
  1. https://www.apa.org/research/action/multitask.aspx

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.