You started a business for a purpose, and you're emotionally tied to that identity which then drives your business decisions, but sometimes you find reality paints a different financial picture.
There are times you may find the business you think you're in is not the business you should be in.
The myth of American business is that you can start a business and get rich, and have a great life. The reality for most business owners is that you struggle and work really hard to make a living, but you stick with it because you're passionate about it.
Measure Success with Management Accounting
What helps you get out of that struggle is having your fingers on the pulse of the key business drivers. Those business owners and CEO’s who are living the dream did so because they reviewed management reports that allowed them to make the kinds of decisions that will increase profitability, and drive their business in the right direction for growth. They were successful because they had good instincts and management accounting.
What is Management Accounting?
Management reporting gives business owners the financial information they need to make better decisions that improve their business operations. Management Accounting enables you to make data driven decisions for your business.
You design a management reporting system by starting with “What decisions do you have to make?”. Those decisions about where to invest your time and your limited resources - that begins with your business strategy.
Re-Evaluating Your Business Strategy
Ongoing planning and strategy are the two main drivers to push a company forward and usher in growth and success. Yet many still continue to look at reports that have nothing to do with the business strategy. In the realm of moving the needle, this is no longer effective. You must constantly review the metrics and be focused on strategic analysis of your business; otherwise, the company isn’t performing at its fullest.
One example of how to accomplish that is by looking at your KPI’s (Key Performance Indicators) on a company scorecard: Strategy & Planning: The Company Scorecard
Looking at profitability by profit center, not just at the company level, allows you to figure out what business you’re really in, and at times what you find may surprise you.
Strategic Decisions to Increase Profits
Here’s an example of a business owner, passionate about what she does, but after implementing management accounting and evaluating her profit centers, was able to make better business decisions to improve profitability.
One Business Owner's Story of Financial Enlightening
This story is about a large interior design store on the main street of Hoboken, NJ back when Hoboken was booming. It was the Reagan years, the economy was on hyper drive, and Hoboken was part of what they called the “gold coast of New Jersey”.
Hoboken is on the waterfront. In fact, the movie "On the Waterfront" was filmed there - facing Manhattan – back when it was a gritty town. There were condos, high rises, hotels being built. People were flooding into Hoboken with money, and this business owner was slammed.
Like so many entrepreneurs, Robin grew the company but she wasn't making any money. She was working seven days a week, and although she was passionate about interior design, like many small business owners, she was struggling with cash flow and not making a real salary. This is a far too common scenario.
Robin was an interior designer and loved it, but really wanted to grow, and to do that she needed to fix her cash flow issues. When I met Robin, we agreed to a barter deal. She helped me fix the unappealing interior of my apartment, and I helped her to better understand what management accounting could do for her business.
We started looking at her profit sectors, and after reviewing her management reports, it got her thinking about the fact that she really had two businesses. She had her services business, and she had her retail business.
The retail business is where she sold furnishings and home decor. She would design somebody's home or apartment, and sell them furnishings. Robin would sell them fabrics to go on the furniture, then sell them window treatments, lamps, pillows, throws and any other kind of fancy decor.
Robin was a good shopper so she was able to buy premium items at great deals and sell them to her clients. For example, on a $3,000 couch she could make a $1,500 profit (50%), marking it up by 100%. Then she could make a couple thousand dollars on other items - the carpets, window treatments and everything down to throw pillows, etc. So, for purposes of this example, let’s say, she made about $10,000 in profit on just the sales of “stuff”.
In her design work, Robin always under budgeted with how much time it was really going to take her. She was estimating a fee for her services based on $150 an hour times a number of hours that she would estimate.
Let's say she projected 10 hours at $150, she would charge $1,500 to do the designs, plus whatever purchases they made. She grossed $1,500 on her time, it could take her twice as long to finish the drawings, but she made $1,500 on profit selling just one couch.
She realized it was time to figure out if she needed to make a decision to change her business model.
First, I got her to track her time, because time is money and everything starts with getting an ROI on your people. Time tracking helps you to see what it really costs to do the work.
That was a game changer because now she could put a real bid together, and that includes the hidden time to drive to the client's house, to meet with the client, to meet again with the client, then to meet with the client once again. (Because it takes three or four meetings, and the actual time to do the drawings, then revise the drawings, then revise the drawings again after every meeting).
That’s what we were able to see we get into time tracking and the true costs of everyone’s time by implementing job costing. Why Job Costing is Essential for Business Owners.
To really understand where you make the most money, look at profitability by profit center which allows you to measure success and figure out what business you should really be in.
Robin began to realize that the biggest profit center of her business was in retail, selling home furnishings rather than mainly focused on interior design services.
When you walked in her storefront in Hoboken, it was a big design studio. There were big tables with drawing boards and lights, right in the center of the space. Then all around the outside, there were fabrics and pictures and books for people to go through, and places to sit at their leisure and browse.
Robin realized that to make the most profits she needed to change the business structure – and the storefront. So, Robin had a wall put up and took the back third for her office and design studio. She took the front two thirds of her storefront, and made it a retail store so people could just come in and buy couches, lamps and pillows, and window treatments – even if they weren’t an interior design client.
Once Robin realized she could make more profits on retail and not have to spend so much time on the services, that increase in sales completely changed and cash flowed to the bottom line.
She was able to increase profits by raising prices to cover all those hidden costs. If clients wanted three sessions she would include that in the bid. That also gave her more time focus on the interior design projects that are worth her time.
Robin was smart. Be like Robin.
How do you measure success? What are the decisions you need to make to improve profitability in your business? Do you know what business you're really in?
We've created resources to help business owners and CEO's understand how to make data-driven decisions. If you're the type to dive into an eBook, check out: The CEO’s Guide to Keeping Score. This guide gives management a roadmap to improving a company’s bottom line. See how you can ‘Put Your Numbers to Work’ by creating a monitoring system for leading indicators, and learn how to read your KPIs to make data-driven decisions.
If you don't have time to get into the ebook, download this Management Report Matrix to see the decisions you need to make and the reports that you'll need to make them. The report visuals include a short description of what the reports mean and how to use them...