Tuesday , December 11, 2018

Six Steps to Improve Your Accounting or Financial System

Many books have been written about business improvements focusing on growing sales, improving customer service, lowering costs, developing better managers, etc. These books include strategies and techniques to help business owners and managers make changes that will result in higher sales and greater profits. Unfortunately, little emphasis is placed on the importance of improving a company’s accounting system—usually financial processes and procedures are considered “good enough” to meet the business’s needs.

 

However, as companies mature and become more sophisticated, the accounting system can be “outgrown,” leaving managers with insufficient financial information to make good business decisions. To avoid this, here are six steps to help both new and existing companies enhance their accounting capabilities in order to mature financially.

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Step 1. Implement an internal accounting system and generate monthly financial statements. With accounting software from QuickBooks, Sage and many others, it is relatively inexpensive and simple for even start-up businesses to purchase a robust, computerized, accounting system that can grow with the company. Setting up the system does take time, and the first challenge is often getting owners to understand that preparing a timely balance sheet and income statement each month is important. The second challenge is getting managers to review the statements to see how the business performed financially.

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Step 2. Compare monthly financial statements to prior periods. Think of financial statements as a scorecard for the business. Since most companies are unable to compare themselves financially to their competitors, companies can compare last month’s scorecard against prior periods. This allows managers to determine where the company has improved and where it has suffered.

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Step 3. Learn how cash flow differs from sales and income. Sales, net income and cash flow are different. The balance sheet and income statement can be used to calculate a company’s monthly cash flow. Ask your accountant or banker to help you understand how cash flow is generated. A company can have strong sales and positive net income and still run out of cash and be forced to close. It is critical to manage your business so it consistently generates a positive cash flow.

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Step 4. Identify and track a small number of key performance indicators. Identify five to 10 critical sales, financial and production factors that make your business successful, and then develop a way to measure and view these key performance indicators (KPIs) every day or week. Examples of some daily indicators may be the number of customer orders received, pieces produced or shipped, or total regular employee hours and overtime hours worked.

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Step 5. Make business decisions that positively influence your KPIs. Management decisions should focus on improving the key performance indicators. For example, overtime increases a company’s labor costs by 50 percent. A company could measure overtime hours as one of its key performance indicators, because its profits might be significantly higher when overtime is low. As a result, managers should then make decisions that limit overtime: reject orders that create overtime or redesign production steps to prevent overtime or price overtime orders higher to recover this additional cost, etc.

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Step 6. Build an annual income budget and track monthly performance against the budget. Developing a monthly income budget requires managers to look forward and estimate where they should be or where they want to be in the future. Future sales revenue and costs are estimated and a financial plan is created. Managers then “work the plan” and track actual monthly performance against the budget. When actual performance is different from the budget, managers can immediately take steps to correct. While budgets are not exact, they are useful tools to help businesses plan to be financially successful.

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As companies grow, their financial capabilities should also expand to support the growing needs of the business. Accounting tools should be developed that allow managers to look forward instead of backwards.

 

The monthly financial statements, Steps 1 through 3, provide a financial scorecard for a company, but this shows past performance. When key performance indicators, Steps 4 and 5, are added, management has the ability to see current business conditions. Adding an annual income budget in Step 6 allows managers to look forward and plan for a financially successful future.

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