Accounting 101/6: lift up your car hood regularly - Managerial Accounting

Yes, I know, Accounting is definitely a dreadful activity that very few individuals enjoy to do in their day's work (except accountants and auditors of course), but it is so much central to Your Small and Midsize Businesses (SMBs).

After all, if you are in business, I assume that one of your greatest motivators is to make money and get rewarded for the time, money and risks associated to your business.

So, don't consider that to review your books semimonthly or monthly, is a drag. Take this chore lightly or better with a view to analyze key figures and find ways to improve your bottom line.

At this stage, I would wish to introduce the difference between "Financial Accounting" and "Managerial Accounting". Go to this page of Mc Graw Hill Online Learning Center where both types of accounting are clearly separate: "Financial Accounting" being essentially maintained for external bodies, while "Managerial Accounting" maintains your books to drive Your business tightly by giving You all details needed.

If you are puzzled sometimes by some accounting cryptic terms from your accountant or your banker, visit in the topical links of this blog, Dictionary of Small Business. This web site is truly a little gold mine regarding definitions of accounting/financial gobbledegook.

Or even better (if you wish to get started with an MBA or always dreamed of getting one), why don't you glance through the following Wharton University Powerpoint presentation (http://accounting.wharton.upenn.edu/ Summer2004/acct101/chap001.ppt) (don't be shy, they will not charge you for it!) and spend some quality time going through it. I am sure Your business will thank You for this effort.

Learn from large companies: Innovate or Die!

I did write already about Innovation in a previous blog, where I linked the word Innovation with Growth. Most certainly, a more positive and optimistic statement than the one used for today's blog headline.

I was amazed recently to read a White Paper written by Longdon Morris on "Business Model Warfare" (a 325 kb pdf, 28 pages document) . Here are some excerpts that should make you think on how to prioritize Your business tasks:

- "The average life of a major corporation is not very long. ... only one-quarter of today's Standard&Poors 500 companies will be part of the index by 2020 and the other three quarters probably don't even exist yet!"
- Among the Fortune 500, the "average mortality rate is 12 companies per year or one per month"
- "Today, the three most critical market factors are accelerating change, increasing competition and increasing complexity"
- "..., the history of warfare and of business is the history of innovations that render past strategies ineffective"

"But whatever it is, one of the qualities that will distinguish the new thing is its 'Innovativeness'. This innovativeness refers to its distinctiveness, its originality, perhaps its usefulness, and more importantly its value."


Last word about this white paper: have a look at page 11 giving you 37 possible innovation targets (go through them and see the ones that might be applicable to Your business and most of all the ones You can afford to complete with success).

If you wish to delve more into Innovation, you might read this piece of work by Robert Heller where Innovation (he calls it "Unconventional management"), how to implement it and its link to Customer Value, will give you a first good roadmap.

If you get hooked by innovation as one of the prime drivers of Your business, you can get fresh news and articles from Boris in his Corporate Innovation Blog.

Another interesting blog to read more centered around Collaborative Innovation from Mike Docherty is also worth to bookmark.

Manage your SMB: Implement a "Dashboard"

Most Large or multinational companies have implemented Dashboards allowing top managers to monitor their businesses at a glance.

But first of all, What is a "Dashboard"? Very easy, the term comes from the automotive industry. If You would have Your new car delivered without a dashboard, how would you know when you need to refill the tank, or if you are driving over the speed limit? Car manufacturers have designed car dashboard giving you all the key elements you need to drive safely.

If we now transpose above concept to Your business, the same logic applies, except that almost every business needs to design its own relevant dashboard. with the key variables important for You, I drafted below the key business processes that a wholesaler might wish to monitor (books have been written about this concept of "Value Chain", the most famous has been written by Michael Porter, See The QuickMBA web site for a short overview.

(Click on the graph below to enlarge it)


Wholesaler Business Process Chain

First remark: you see that I did split the value chain in discrete elements (by the way, by optimizing every one of these elements, you will most certainly be close to maximize the bottom line of Your business).

Now, I let you draft the value chain that is the closest to Your business.

You certainly think at this stage of your reading: he started his blogging about Dashboards and now he goes on about Value Chains, How is he going to reconcile the two?

In fact, Both are very intertwined. In my search on Internet, I was amazed to find the case of "Now Foods" on iDashboards.

"Now Foods" company managed to reduce its dashboard to just 5 Key Performance Indicators (commonly referred to in large businesses as KPIs) tightly linked to their specific value chain:

* Two Financial indicators:

- Return on Capital (the general principle here is that if such return is below current interests on savings accounts, do not risk and invest your time and energy in Your business as your bank will give you a better return)

- Monthly overhead as a percent of net sales (overhead costs should logically decrease or at least plateau in percentage as sales increase)

* Two Customer service oriented indicators:

- % of orders shipped complete (nothing irritates more a customer than partial shipments)

- % of orders taking more than 24 hours (based on this psychological human aspect that it often takes customers months to make up their minds but once they take their decisions, they just want their goods or services delivered for yesterday!)

* One indicator to keep an eye on Competition:

- "Now Foods" monthly market share (drawn I assume from marketing research regular findings)

Notice the beauty of above dashboard. In a nutshell, this company traps only 5 KPIs that truly represent their goals in terms of company excellence.

Brainstorm and attempt to come up with the KPIs truly relevant to Your specific business and You shall be on the right track to get a near-perfect dashboard guiding Your business towards excellence.

Last word of advice, make sure the basic data used for your KPIs are collected reliably and timely. Such basic data should also be aggregated consistently to allow for quarterly and yearly comparisons. Be attentive to these points, as I did experience quite often in large companies, unreliable data being collected, hence defeating the whole purpose of KPIs for effective decision-making.

Project Manage Your New Major Business Commitments

Taking a new major business commitment is most of the time a fearful endeavor. Plenty of question marks will pop up in your mind about its long-term benefits and also, you know it, its opportunity costs (i.e. committing funds and other resources to one commitment might prevent you to pursue in the future other business initiatives possibly more beneficial for Your business).

I propose today to follow a systematic methodology that should give you a better base to shape all elements related to your future business commitments.

First of all, consider business commitment as a project (defined as a specific business endeavor that has a beginning and an end) Typically, professional project managers would cover systematically the following business aspects both PRIOR to commit AND also DURING project implementation:

(Click on the graph below)


Project Components

* SCOPE: If for instance your new business endeavor is a new product, break it down in its main features and ask yourself if you wish to consider each feature as being "In-Scope" or "Out-of-Scope". By defining precisely the borderlines of your project, you shall have a much better grip on it.

* TIME: In which timeframe do you wish to achieve for instance the official launch of your product?

* COST: What is the cost upfront? Don't forget here to perform a costs/benefits analysis over say up to three years after the product launch.

* QUALITY: Define the quality parameters you wish to have in your product to make it successful on the market.

* HUMAN RESOURCES (HR): How many bodies do you need to add to get to the stage of official product launch and also how many bodies do you need afterwards?

* COMMUNICATIONS: The more detailed/ transparent/ motivational Your project/ future product will be (at least internally), the better it is.

* RISKS: Try to list all major risks associated with Your endeavor and also make a true attempt at finding the feasible corrective actions You would take in case a risk materializes.

PROCUREMENT: Most of the projects will entail some kind of procurement. Make sure you set-up a follow-up system to keep track of procured items.

INTEGRATION: Of course, ALL above 8 components are fully interlocked like a big puzzle, and each time one of the components will be activated, it will impact favorably or not the other project components.

Want to know more about Project Management, you can visit the following Web sites/ Blogs:

1. A.J. maintains a Blog exclusively on Project Management. Moreover, A.J. devotes most of his professional activities to SMBs;

2. ProjectConnections.com is also a Web site exclusively dedicated to provide project management materials. Though ProjectConnections has a paid membership approach, many project management articles are available free of charge and should be sufficient to enhance your project management skills;

3. Finally, even if your future business commitments/ product launch is by no means as complex as launching the next orbital satellite, have a look at the NASA Web site on Project Management. It is very informative and if nothing else, it might be one way to get back some of your hard-paid tax money!

Accounting 101/5 - How much bank loans/overdrafts should you go for?

Depending on your start-up capital and how much retained earnings You accumulated in your balance sheet, you will face sooner or later the necessity to get additional financing to fund your growth. But the whole question is: "How much should you ask for in order to keep My business healthy?" Books have been written about "Leveraging your capital".

What does this exactly mean? You can find a good description at the Australian New South Wales Small Business site where return on Assets and Equity is covered. Another article from Andrew J.Sherman "Commercial Lending for Emerging Companies" is also worth reading as it outlines the main dimensions to be considered when borrowing money for Your business. They are definitely arguments to lend money to expand Your business, but the main question is how much and when to stop.

When you will be facing your banker, he/she will immediately ask for the latest set of Balance Sheet/Profit & Loss statements, in order to assess:

* How much credit he/she can afford to grant you?

* Are you capable to reimburse the loan and its interests without putting undue strain on Your business?

* And of course (but he/she won't tell you too much about that) how much gross profit will be generated for the bank?

Now, let's first calculate Your equity (made up of Your initial capital + the retained earnings - net profits of current and prior years - You left in your company to allow it to prosper over time). To make things simple, let's say the total of Your balance sheet is $100,000 (it does not matter here if we speak about Assets or Liabilities as per the Golden rule of accounting, both sides should be equal), and the total of intial Capital + Retained Earnings = $60,000. If now Your total Debt to bankers is $25,000, the Debt to Equity ratio will be equal to $25,000/$60,000 = 41.6%.

For many financial institutions, this is still OK, though they will start to be less friendly (i.e. to ask for collaterals to protect their interests just in case Your business goes sour). Their rules - it might vary with Your bank(s) - is that they will start to scrutinize Your balance sheet once You reach a 50% Debt/Equity ratio. Remember, bankers are not here to take risks with You but to earned money on loans (we do not want to open the pandora's box of bankers' business where they take immensely greater risks themselves on hedging on currencies or other portfolio management businesses).

My best advice is here again not to go too far (after all, What do you prefer?: "Grow more slowly but safely and build for the future" or "Grow fast and take undue risks that might eventually lead to future drastic, tough-to-make correctice actions"). Try to use the following advices and you shall be safe to run Your business:

* Add all your bank interests paid or planned and compare them against Your gross profits before tax and before taking these interests into account. If the ratio comes up at over 20%, ask Yourself if it is really worth to take the risk. One key question here is :"did you spent all Your energies and available resources throughout the whole year to give back such a major chunk of Your profits to bankers?"

* Put a ceiling on the ratio Bank loans and/or overdrafts divided by (Capital + Retained Earnings). If this ratio is above 50%, again ask Yourself if you do not go too far in letting other parties driving Your business for you.

* Finally, as the principal of Your loan is also repayable to the bankers, have a look at how much You need to repay every month or quarter and compare this amount against Your common recurrent business expenses. If the % is over 10%, ask yourself again the question if such bank loans truly help you to expand Your business or conversely throttles down your business initiatives.

For public SMBs: Counterbalance Sarbanes-Oxley costs with streamlining gains

I knew that Sarbanes-Oxley (commonly referred to as "SOX" - don't confuse them with the American famous baseball team, they are less fun to watch !) new regulations to reduce significantly company's malpractices arising from Enron or MCI would increase your internal costs (Europe is certainly not being far behind with a huge fraud case - Parmalat - an $18Bn fraud - Yes you read it correctly I wrote Bn and not M !).

But one very big issue that arose from these huge straight frauds, is that we have to live now with new heavy-burden regulations that tax companies very heavily. According to Karen Kerrigan, the additional costs created by SOX amounts to no less than 2.7% for public companies weighing $100M or less ! The same point is also echoed by Jeff Cornwall in his "Entrepreneurial Mind" blog

Now as the boss of such $100M company, to offset a cost increase of $2.7M is a tough job. Do you add it to your selling prices or slash some costs abruptly to preserve your bottom-line ? Of course not.

There should be a better course of action and I would propose to take a positive standpoint. It is for sure given the major sanctions that top executives could go through (jail sentences and Millions of $ of personal fines) that you will follow very closely the SOX review process.

Why not go the extra mile and appoint a team of 2/3 Senior Executives who will be tasked to analyze and report on procedures/processes that are too complex/too heavy for the task at hand? Only by getting your hands dirty (I am sure you will be surprised by some findings) and having an open mind to streamline either an outdated or top-heavy process, you will then be in position not only to recoup these unavoidable regulatory costs, but more important to get an excellent insight into non-optimal processes.

As SOX focuses on how you collect, store, report key company data, and as a starting point to initiate streamlining actions: why don't you have a look at these lean management accounting principles?

About an Internet little gem: "The Free Management Library"

You probably observed through my different blogs that through my comments on SMB management, I always attempt to express more or less complex management theories in simple and directly applicable terms. By doing so, my intention is to give You the Right Foundations for a future SMB growth. As a management practitioner, I am fully convinced that "Management is an Art" more than a Science.

Nevertheless, when carrying out Your business activities, you still need excellent roadmaps that are most of the time spread all over the place and the main question becomes then "Which one is applicable to the problem at hand?".

Searching for adequate materials to support the "Mission" of this blog, I found out a little gem that I wanted to share with You.

Here is the link,

It is really worth to explore it as Carter McNamara (MBA, Ph.D) gives you here a fantastic portal tool to familiarize Yourself, refresh or dig deeper on management concepts and techniques. It is genuinely amazing to go from one link to another and realize that many management skills you wish to acquire are just there at your fingertips.

Here are for instance two quotes from Carter: 'For many of us, the older we get, the more we realize that there's a "simplicity on the other side of complexity". Information is no more credible from being complex -- and too often, that complex information is even less credible because it's darn hard to apply to the realities of living and working in our world.'

'You can save a lot money by getting free management information on the Web
If you can learn to first seek free management materials on the Web before you pay for management services, then you can save a great deal of money -- often by not having to
purchase services at all.'

My best advice each time you will face a sizeable business issue to solve would be to spend a bit of time to review this excellent web site (maintained for the last 10 years by volunteers on the Mozilla DMOZ model and moderated by Carter).

To make sure it will always be there (just in case of emergency), I did include it in the "Topical Links section" of this blog.

Enjoy it! but most of all use it to strengthen Your future managerial decisions.