If You Don't Know Where You Are, How Can You Tell Where You're Going?
Roger Kiddle
We are all aware of the phrase "failing to plan is planning to fail." Every plan must have a starting point. If you do not know the starting point, how can the plan work? What kind of management tool do we have?If I ask you to tell me how to get to Geelong, you can’t do it unless you know where I am leaving from.
Do You Have A Good Management Tool?
We do a lot of planning work with clients and a proper plan is a management tool that:
makes you think through your business plan and identify goals and strategies for achieving them;
also provides a projection of future revenues and expenses based on the business plan;
and gives a projection of the future cash-flows likely to be generated by business activities and identifies funding requirements;
acts as a diagnostic tool which reveals the profit contribution from the various activities of the business;
and functions as a planning tool which enables business operators to change outcome before events occur;
offers a map of the data that needs to be captured to provide useful management information
provides the means of delegating responsibility for aspects of business operations;
and is the benchmark against which future outcomes may be evaluated.
Garbage In, Garbage Out!
Any plan will be flawed if it uses incorrect opening values. For example, if your debtors include uncollectable amounts, the plan will have a false expectation of receipts.In our experience the quality of financial and management information available to business owners is not good.Some examples:
Vehicles you purchased on HP. No vehicle asset in the balance sheet and no loan liability. Loan repayments going to the balance sheet although the loan account hadn’t been created; so it creates a false “asset” as the payments included all the interest charges which should be going to the P&L.
Employee entitlements not being recognised. Most businesses have liabilities for annual leave, long service leave and things like accrued RDO’s. These can be substantial liabilities and you must recognise them on a month to month basis. If you omit them from the accounts, do you add these costs when calculating your labour charge rates?
Your accountant only takes up depreciation expenses after year end. A recent example: A small business had a tough 2019 but thought they were OK - their Xero file showed a profit of $45,000. When we looked, we found the depreciation charge for the year was $130,000, meaning the real result was a loss of $85,000. Wrong numbers can give a false sense of security.
If you get your numbers right, you can then make them go a step further and get real value by analysing what is happening in the business.
More Examples Of The Value Of A Good Management Tool:
A company with three quarries was happy making a profit of $300,000 for the year. By analysing their numbers, we found two quarries were making $400,000 and one was losing $100,000. By fixing the loss-making quarry, the company had the potential to double profits. You cannot safely do this analysis without complete, correct and up-to-date accounts.
A company supplying the same products to the various majors in the marketplace thought they were making the same margin from each customer. A proper analysis showed that, on one of their accounts, they were making 9% less gross profit than was the case on all the others. Consequently, by renegotiating with this customer, they were able to add an additional $50,000 to their bottom line for the year. Again, you cannot safely do this analysis without complete, correct and up-to-date accounts.
A transport company improved their bottom line by over 300% over three years simply by analysing what they carried, where they carried it, who they carried it for and how they carried it. From this matrix they could easily identify which activities made the best profit. Once again, you cannot safely do this analysis without complete, correct and up-to-date accounts.
In every business, some products, services or activities will produce differing profit outcomes.When you have detailed and accurate accounts, and when you can identify where you are making the best returns, there is only one outcome: your bottom line will improve.
In summary:
You must know where you are before you can plan;
Accurate accounting records are fundamental for this;
Using your database as a management tool will increase your bottom line; and
Having good management information enables you to focus marketing on the good things and management on the not so good things.
To sum up with another common phrase: knowledge is power!
Are you getting valuable information about your business from your own accounting system?
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