Three Ways to Improve Your Company’s Financial Instrumentation

First, that many small businesses simply don’t pay enough attention to the quality and timeliness of their financial data. It thereby provides them not only misleading information, but also provides it too late to be useful. Small businesses likewise generally don’t analyze and forecast, but rather react. A small reaction to a small loss. And another and another. Chasing the decline in margin with cost reductions, losing a little money and making a little money month-by-month on the way down.

Secondly, instead of well-defined profit and performance targets that they strive to make, managment reacts most aggressively to avoid losing money. It’s like addressing a golf ball on the tee box, where your self-talk is Don’t slice. Any golf coach will tell you that’s not likely to reduce your handicap.

So, what can you do to break away from operating at or just above breakeven? Here are some ideas:

1. Upgrade the quality and timeliness of your bookkeeping and financial reporting. You need solid, accurate revenue and cost information on a weekly basis, if possible — at worst monthly.

If the accounting steps to implement the above concepts are not crystal-clear to you, hire some help from the outside. You could be well-served by investing in some cost accounting and financial report interpretation know-how from a resource you can hire by the hour or on a monthly retainer. This may not be your CPA, but rather someone with a good financial & operations background.

Ask that same resource to compare your company to its peers, and give you some targets for critical performance ratios, like:

1. Gross margin to Sales
2. Net Profit to Sales
3. EBITDA to Sales

That was the other underlying assertion in this member’s observation — that many small businesses simply set their performance sights far too low. Again, in my experience, a reality. I’ve seen businesses shooting for 4% net profit, when 10% is, in fact, attainable. Think about that one — 2.5 times as much profit for exactly the same amount of work — why not. In many cases, businesses regard working harder as a strategy. A value system, perhaps, but not a strategy.

Possible strategies might be raising prices or reducing costs — two things that would actually improve the Net Profit to Sales ratio. Doing more work for the same mediocre results is not a strategy — it’s a downward spiral. Sometimes it takes an outsider’s perspective to jostle a business out of its comfort zone.

Do you believe (or have you observed) that small businesses have an uncanny ability to operate right at or above the breakeven line? Would you click comments below and share your viewpoint?

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