Size Doesn’t Matter – Sound Business Practices Do

Whether you are a small business or a Global 100 business, the underlying tenets are the same when it comes to financial management and sound accounting practices.  The ability to “know the numbers” and what they mean is of critical importance to achieving the maximum return on your investment and bottom-line profits.

Many companies mistakenly believe that when resources are constrained (as they are for all businesses to varying degrees), expenditures on financial, accounting, and enterprise systems are luxuries.  The opposite is true – having systems which enable you to run the business – see the business’ actual performance, forecast trends, and make comparisons to budgets – make the difference by providing visibility to your organization’s activities.

The right information system and tools for a small business won’t be the same as the one for a giant corporation.  Size does matter in selecting the appropriate system for your business, but what you look for in the system – visibility of results, cause and effect, activity and cost, activity and revenue – is the same.

A business may generate needed visibility by utilizing the existing capabilities in an accounting package through the design and structure implemented by the business.  “Standard” templates won’t lead to anything more than “numbers” which provide financial and tax reporting and lack the management information needed to run the business.

Organizations large and small need to know how the activities and decisions the business has made connect to the financial results.  Transparency is available only when the business invests in the development of accounting systems that support analysis.  Every business resource is limited.  In order to make the most of limited resources, businesses need to be able to make informed choices between projects of every type – investment, clients, markets, and operations, to name a few.  Without the right information available in a manner which contributes relevant, reliable inputs, the accounting system is little more than an abacus racking up the totals in and totals out.

To become a financial or enterprise system, accounting systems need to be designed to replicate the business’ structure, operations, and relationships.  This can mean more detail or the right detail, depending upon the nature of the business.  Determining what detail have means analyzing your business and understanding what the key performance measures are.  Simply having revenue isn’t enough.  Having revenue information by product or customer provides more insight, but doesn’t tell you about the “quality” of the revenues.

To understand the quality of revenues, you need to understand the direct cost of the sale as well as its share of business costs.  This complete cost lets you know how profitable the sale is (part of the complete cost may be the cost of “financing” the receivable).

Beyond having the performance measures, someone must be accountable for results.  Linking compensation to performance aligns the organization and drives it toward results.  For the organization to “buy-in” to a performance system, the measures must be accurate, timely, reliable, and relevant.  Members of the organization must believe that the numbers reflect performance and results from activities accurately .

Every business has limited resources.  Yes, the magnitude of the resources varies from company to company.  The need to use those resources effectively and efficiently to achieve positive outcomes is the result of how you do business.  Understanding the relationship between activities and processes is a shared objective of every business.  Improved financial performance is a direct result of running the business using numbers that accurately reflect the business.  Does your organization have the capability to generate the numbers you need?  If you get the numbers, are you making the connections between activity and result?

Here are ten things to do for your organization:

• Ask for a complete set of the financial statements and other reports your current system is capable of generating
• Review existing reports to determine if you can make the connection between your activities and processes and the numbers you have
• Determine if your current system has the capability to generate custom reports
• Make the commitment to work on making the connection between the numbers generated for a particular reporting period (say a month) to the activities you know occurred
• Identify gaps in the information
• Talk to your bookkeeper, accountant, etc. and get his/her perspective on the numbers
• Determine if you need an independent set of eyes to help you assess the numbers and your system
• Determine if your organization needs to make changes to your financial and business management systems
• Make a commitment to understanding the numbers and financial results – take a class, hire a consultant to work with your organization
• Invest time, effort, and resources to get the information that will improve your ability to do business

Improving financial performance is a matter of working on the “how” of doing business.  Financial results provide the clues, information, and signals that show you what to do more of and what to stop doing.  Size doesn’t matter – really, but sound business systems do.

Copyright ©2005 F.O.C.U.S. Resource, Inc.