Why Financial Statements Don't Make Sense.

Ask any small business owner and we will tell you that “we don’t use financial statements”, “I confess that I don’t know how to read them”, or “they just don’t make any sense”. Are small business owners ignorant, uneducated, or dumb? No. Our financial statements are dumb!

In fact, we small business owners are so smart that we actually figure out other ways of tracking our businesses just so that we can make sense of our cash flows and survive an extremely competitive environment. We will micro manage by product, class of service, or sales category. We’ll track sales by week, month, or quarter; we’ll track cash flows, expenses and anything else that give us a clue as to the health of our companies; all without the aid of regular financial statements. So why, then, is the very tool that seems so universally sought as the standard benchmark by big business, stockholders, bankers, and all financial institutions so important to them and so totally useless to us?

It’s because they are made by accountants for accountants. It’s just like lawyers making our laws. It’s designed to keep them in business and keep us guessing! And it is all due to the format which was somehow deemed to adhere to a standard which they figured was great for quickly analyzing a business’s credit worthiness; the insidious generally accepted accounting principles (GAAP). Statements so formatted are typically for external use (read that for your bank or lending institution) and gives them some assurance that the reports have been prepared in accordance with a common set of ground rules. That’s fine for them but does nothing for me.

So why are they confusing, hard to read, or just not in sync with our needs? The answer is that they use absorption costing. Simply put, that means that some fixed overhead expenses are allocated directly to all products, both those that are sold and those still in inventory. The result is that an expense can be held as an asset until it is sold. You may have already paid that expense, but it won’t show up on your statements as an expense until the allocated inventory has been sold. By now you’re probably thinking “no wonder these reports were confusing, they’re nuts”!

Is there a solution? You bet there is! Keep in mind that accountants are all about compliance. They consider their work to be all about documenting a company’s financial records for external users such as banks, tax agencies, and the like. They often figure that by getting the tax filings done, statements prepared, and everything nicely balanced their job is done and all that is left is to bill the client. If that is true in your case, then you are letting them off the hook too easily. You should also be asking for some reports that would actually make sense in helping run your business. Those same statements your accountant has prepared can often be easily reformatted into something just a little more intuitive using the Contribution Approach. Simply stated, this avoids allocating fixed overheads to unsold inventories and actually deals with period costs as they occur. Chances are that your accountant already has the data needed to re-issue company financial statements using variable costing instead of absorption costing. For many companies all you need do is request those statements in addition to those already issued. Statements showing contribution margin and realizing fixed period costs as they occur not only make more intuitive sense, they actually give you information which you can use in the decision making process. Gee, what a concept; a financial statement that you can use!

At this point I’ll add the standard disclaimer that I’m not an accountant and I’m not attempting to give anyone financial advice. What I am doing, though, is urging you to speak with your accountant and ask them if they are capable of creating financial statements which are more suitable for your internal use. There are a number of different tools one can use to measure and improve one’s performance. Variable Costing, Cost Volume Profit (CVP) Analysis, Theory of Constraints (TOC), Lean Six Sigma, and other tools may or may not be appropriate depending on your particular circumstances. Being able to measure your business’s performance is one of the keys needed to unlock the doorway to improvement. Creating reliable metrics requires accurate data that is usable. Don’t settle for statements that you only pass along to placate others. Insist on statements you can use in your every day decisions!

Bob Banasik is a senior business advisor and an accredited associate of the Institute for Independent Business, and can be reached at bob@bestbusinessassociates.com .

© 2009 Best Business Associates LLC

Facing economic downturn in business

When the economy takes a downturn, or if a business simply experiences a downturn in sales, many businesses react by cutting back budgets in order to conserve funds in the face of declining sales. It is an instinctive reaction that is often scorned by would be advisors. They say things like “when things slow down, that is the best time to keep up with your advertising efforts”, citing the fact that there might be less competition in the marketplace therefore one who continues their efforts would logically stand out and achieve greater results.

Baloney! There is a reason that your instincts might lead you to conserve your resources, cut back on expenses, and reduce advertising budgets. Your instincts have probably served you well in the past, why should you start ignoring them now? If you examine your decisions, they are probably based on sound reasoning. If something is not working why would you continue doing it? If your advertising is not pulling its weight and not bringing in the results intended, why continue? Albert Einstein once said “The definition of insanity is doing the same thing over and over again and expecting different results”. If a smart guy like Al thinks it’s a bad idea, I’m betting you might agree.

So what are these would be advisors thinking anyway? Are they nuts? After all, it’s not their money they’re spending, is it? The answer is…they are both right and wrong. They are right in that one may not be best served by “hunkering down” and cutting budgets and just waiting out the downturn in hopes of “things getting better”. They are wrong in recommending simply staying the course in hopes of the same “things getting better”. Something has to change.

Chances are that when sales decline there are one or more reasons why that has happened. It’s easy to blame it on the economy, especially these days. But so what? That doesn’t change your need to pay rent, payroll, or even, perhaps yourself! No matter what the reason is, it is your job as CEO to examine or re-examine the market and determine a course of action. Your goal when you started your business was probably not just to “ride the market and hope for the best”. It was more likely something on the order of maximizing talents and efficiencies in order to satisfy some market need with a high value proposition. My premise to you is that nothing has changed! At least, nothing should have changed, but it obviously has. That is why sales decline. It is not because of bad economies. It is not because of recessions. Those are all symptoms of what the other guy is experiencing. That is what has happened to the financial markets, the housing markets, construction, and who knows what else. They have lost their value propositions! It just so happens that your market may have been influenced by that, but that doesn’t change anything for you. Your job is still to provide high value efficiently, right?

So simply advertising that which you have done in the past would be kind of crazy if things have changed, right? See, your instincts were correct! And you were half right! You got the part right about stopping doing what was not working. You just forgot to start doing that which you must do in order to grow. You must re-connect with your target markets and find out what they now value most. And by the way, you must continue to grow, because the alternative for any business is ultimate failure or an orderly exit. Either way, that party will be over.

So what should you do? Just what you’ve done in the past…or at least, what you should have done in the past. Your customers form their unique value proposition by combining direct input from their perceptions of your company’s offerings with their needs or desires. If, in their mind, that unique value proposition (UVP) is higher than those they form with alternative suppliers then you get the business. It is that simple. You control the Unique Selling Proposition (USP) which your company exudes in the form of product/service breadth/depth, pricing, availability, personalized service, or perhaps other factors that your customers perceive have value. And this is exactly what I find has changed when sales decline! Through time, a disconnect is formed between that which we feel has the greatest value perception in our customers’ minds. In short, what turned them on in the past is no longer working. They now value something different. It may be similar or quite different. The point is, over time we tend to lose touch with that most precious connection with our customers and also those who are not currently our customers, but could be if we “only knew”!

Getting back in touch with those two groups, customers and potential customers, and finding out just what they most value today in their supplier is often an epiphany. It is rarely that which worked ten years ago, and is rarely what you think it is today. Strategic marketing is not a task. It is not a tactic. It is an ongoing discipline designed to ensure that all your company’s messages and contact points are germane. It is only through knowing what your customer values today that you can advertise messages which are effective in bringing desired results.

When sales decline it is time to cut back on that which is not working. It is also time to dig into the marketing puzzle to find out why and what needs to be changed. USP, VOC, SWOT are tools used to scientifically arrive at solutions to those questions which make your tactical marketing efforts more efficient and productive. Even in a “bad” economy, businesses need to grow. If your company’s sales are flat or declining, take action now before your party is over!

© 2009 Best Business Associates LLC

Job Descriptions Save and Make Money at the Same Time.

Small business owners are always eager to find a new opportunity or special deal. One of the biggest opportunities stares us in the face every day, but few of us actually take advantage of it or even recognize it. It is very low cost and will provide rewards to your bottom line for many years to come with little or no re-investment. “It” is your staff, or more accurately, how you optimize the functioning of your staff.

We have all faced issues with staff at one point or other in our careers. Perhaps we’ve had “tough” bosses, a self centered colleague, or an uncooperative employee. If you employ people in your company other than a marriage partner, then you owe it to yourself, your company, your customers, your suppliers, and your staff to put as much effort into optimizing their functioning as you do in other facets of growing your business.

What does a business owner actually do?

One of an entrepreneur’s main tasks is creating jobs. You created your own job and you create jobs for your employees. If you create a product the first thing you think about is how you are going to communicate its features and benefits to potential customers. You will want to make sure you tell potential customers how it works and make sure their expectations are on target. You will want to optimize their experience with the product. The same is true for your staff. You create the jobs, but do you actually write the brochure that explains its features and benefits? Do you write the operation manual so that the functioning is optimized? Many of us seem to think that the osmosis[1] method will provide all the training and communication any employee (new or existing) needed. While that method works well for cellular transfer of fluids, it is painfully inadequate when used for staff communications, and that is why we often hear terms like “I just can’t get good help”, or “my biggest problem is staff”. Those phrases simply illustrate problems we have caused ourselves, and opportunities we have lost by failing to develop our staff with as much effort as we would use to develop a new product.

Opportunities.

So what are the opportunities? They exist on both the left side and the right side of the balance sheet. There are huge opportunities to save costs associated with staff and at the same time improve operations and sell more product. Save more money and make more money at the same time; boy that is music to this set of ears!

We all know too well the expense associated with hiring. There is the cost of advertising the job, interviewing, selecting candidates, more interviewing, hiring paperwork, training, inevitable (don’t believe that misnomer) mistakes, time to come up to speed, firing and repeating the whole process because of hiring mistakes…the list can go on and on. If we could eliminate or substantially reduce that side of the equation would it not be worth just a little effort?

Now, on the plus side, I can think of increased sales due to staff working together more efficiently, employees performing their job more consistently, staying in their job longer due to better working conditions, resulting in knowing the customer better due to longevity of employment, resulting in customers buying more because they have greater trust in people they know, and on and on. The bottom line is that if the staff works better the company works better. Does that not sound like an opportunity worthy of our attention?

The Missing Link!

By now you have probably guessed that the first tool we need to accurately communicate with all of our employees is a job description. If you are like many small businesses that I encounter, creating this is the first step in realizing more from your current staff, making the hiring process more efficient, and setting up processes that can help your business scale up rather than languish at a plateau for the foreseeable future. We don’t want to stop here, of course, but it is a necessary first start to systemizing your business for both the long term prosperity of your company and for your own peace of mind. There is a reason successful companies use job descriptions…they help.

It’s easy!

Perhaps getting started isn’t easy, but once you do you will be amazed at how the flow becomes second nature. You know which tasks need to be performed. You know what behaviors are needed to succeed in your company. You are now finally going to share that knowledge once and for all! This tool will allow you to better communicate with your staff whether they number 1 or 1000. You won’t have to repeat yourself anymore because everyone will be on the same page, literally! Further, when it comes time for the performance evaluation (and yes, you do need to take advantage of that opportunity as well) you will have a benchmark from which to base both positive feedback as well as encourage improvement in behaviors you feel might need attention.

Let’s get started.

Where do we start? I’ve included an example of a job description below which I used in my photo imaging business. Keep in mind that this is only an example, and you might want to look for others as well, but this will at least start you on that road. The job description below was for a photo lab technician who also handled some customer service functions. I mentioned performance evaluation so I’ve also included my former company’s “required performance standards” sheet which ties the job description together with a set of behaviors that would result in a mid-line performance evaluation. All of these documents were included in my Employee Handbook which was distributed to every new hire, as well as existing staff if there was ever an update in any of the sections. These documents provide the foundation on which you can build a systematized means of communication through regular staff meetings, one on one discussions, and spontaneous consultations. Taking advantage of this glaring opportunity is a first step in performance improvement…both yours and your company’s. If you have any questions about how this works, send me an email at bob@bestbusinessassociates.com and I’ll be happy to respond.

BEST PHOTO LAB, INC

NON‑EXEMPT POSITION DESCRIPTION

Title: Lab Technician

Date Prepared: May 5, 1991

DOT #976.687‑018

Reports to: Lab Manager Prepared by: R. Banasik

Purpose of Position: Plan, organize, and perform the general activities associated with the operation of a retail based photofinishing lab; typically including such functions as operating developing and printing equipment, computers, densitometers consistent with quality standards and other technical specifications, established schedules, and overall objectives of the company.

Principal Activities: Maintain consistent flow of work, materials, activities through constant interface with customers and other staff members. Perform tasks as necessary to ensure timely completion of orders while maintaining high quality standards. These tasks to include (but not limited to) the following:

Customer Service: Greet customers upon their arrival, input order‑entry data into computer system, identify materials to be processed selecting appropriate routing, queue materials in appropriate area, deliver finished products to customers, suggestive sell film and enlargements, answer questions and offer counseling to improve customers' picture taking experience. Maintain a professional, high‑tech image to customer at all times.

Film preparation: Select film from queue to be processed. Identify film type and time due. Trim and attach leader card and introduce into film processor assuring proper operation and take‑up. Remove exiting film and match with appropriate order envelope and queue for printing, assuring that earliest due times are kept in front of queue for first printing. Sort by type, size, desired order, etc.

Printing: Select order checking for earliest due times. Program printer console appropriately, print film according to customer order, check each neg for density and color classification, record number of prints and order number on envelope, inspect finished prints and perform any necessary remakes. Enlargement centers, color copy centers, and inter‑neg machines all require similar diligence.

Packaging: Select completed orders to package according to earliest time due, carefully sleeve negatives avoiding handling or scratch marks, ensure twin‑check number matches, neatly insert prints and negs into order envelope with "good" print on top, check print count, price order.

Order filing: Scan orders at workstation, verify print count and price, verify proper completion of order according to customer's specifications, log into system and file alphabetically. Ensure orders for same customer are together, ensure all orders are separate and not stuck together with another.

Technical support: Observe, report, and correct anomalies. Observe equipment alarms and resolve cause. Keep equipment free of dirt and dust, cleaning all as necessary.

Quality control: Perform densitometric analysis per Kodak specifications, monitor and correct balances, lamphouse values, master/paper/neg channels, slopes, etc. for deviations. Input all pertinent data into technical quality management system and transfer to Rochester as prompted.

Startup: Power up equipment, check all transports and racks for smooth operation, check all fluid levels, check instrument readouts and sensors, install necessary hardware, perform daily balance procedures and input data, bring all equipment to operating status. Run reporting procedure, network startup procedure, check night drop, bring store to open status, make coffee.

Maintenance: Clean work areas, using central vac, glass spray cleaners, solvents as necessary to maintain a clean, high‑tech image and freedom from dust. Clean equipment, racks, and tanks per manufacturer's schedule. Remove accumulated trash to dumpster.

Chemical handling: Review Veritas safety procedures. Observe all warning labels. Familiarize yourself with MSDS on all chemistries stocked in lab. Mix chemicals as needed as per manufacturer's specifications and equipment needs. Check labels when selecting chemicals ensuring all proper parts are correct, perform accurate measurements, use eye protection at all times, double check labels after measurements, introduce into appropriate tanks, again check labels. Inspect area for cleanliness and wipe up any spills. Upon error detection, stop all production and notify supervisor immediately.

Shutdown: Finish production, bring all equipment to standby status, remove and clean all crossovers, clean entrance and exit rollers on all racks, inspect and clean work areas, remove effluents and re‑mix replenishers as needed. Perform POS shutdown procedure, bring store to closed status.

Stock Control: Record & check all incoming shipments, input POS stock data, price & display merchandise. Observe inventory requirements, report shortages.

Best Photo Lab Inc.

Required performance standards

There are 10 areas of generalized performance upon which all staff are evaluated. The following descriptions would result in an "acceptable" evaluation.

Job Knowledge: Employee should exhibit a well-informed working knowledge of essential skill and general education required to perform responsibilities competently.

Organizational Ability: Employee should demonstrate the ability to properly organize work and use available time in an appropriate manner, set goals, plan work, and establish priorities.

Quality of Work: Work should be of a quality that can be depended upon, with few errors or incompletions; and should be accurate, consistent, and thorough.

Communication: Skills that would meet job requirements would include the ability to present ideas and information effectively as required by the job.

Team Work: The employee should be receptive to supervision and team efforts; interact well with co-workers in job related tasks, and demonstrate a willingness to cooperate with others in attitude toward work affecting actual performance, the company, and associates.

Initiative: An ability should be demonstrated to contribute and/or carry out new ideas or methods. The employee should occasionally show initiative or resourcefulness, and be a periodic contributor.

Problem Solving: Employee should demonstrate an ability to comprehend work problems and frequently suggest alternatives for solutions.

Decision-Making: The effectiveness with which an employee handles situations that require discretion and/or decision making should show a usually reliable judgement; and apply good common sense to work problems and responsibilities.

Flexibility: In constantly adapting to changes in business conditions we should require a normal amount of explanation and instruction to understand and adjust to changed conditions.

Quantity of Work: The quantity of work produced and the speed of assignments completed should compare to and meet our normal expected job requirements.

Required performance standards - Management addendum

Goal Setting: Managers should establish goals and execute plans as required to meet departmental objectives through the effective use of subordinates.

Resource Control: Management must demonstrate the ability to provide for the efficient utilization of resources (financial, human, materials, etc.) during planning and administration of budget responsibilities, and handle resources well within established guidelines and timetables.

Subordinate Development: A manager must use their abilities to properly delegate responsibility and develop subordinate capabilities.

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[1] Large quantities of water molecules constantly move across cell membranes by simple diffusion, but, in general, net movement of water into or out of cells is negligible. For example, it has been estimated that an amount of water equivalent to roughly 250 times the volume of the cell diffuses across the red blood cell membrane every second; the cell doesn't lose or gain water because equal amounts go in and out. (Colorado State University 2000, accessed 2008 via http://www.vivo.colostate.edu/hbooks/cmb/cells/index.html )

© 2009 Best Business Associates LLC

David competing with Goliath...small business CAN compete effectively!

Many small business owners occasionally get the feeling that they are fighting an uphill battle. They see businesses all around them which are larger, more powerful, and seemingly immune to the ups and downs of small business cycles. It sometimes feels like they are really incapable of competing because they don’t have the enormous resources and other advantages of big business.

Have you ever felt that way?

When I meet with clients who are experiencing flat or declining sales, our discussion often turns to their USP (Unique Selling Proposition). Their USP describes how they differentiate themselves from the competition, what makes them unique, and why customers would want to buy from them. It is often something that they have not revisited for some time and is in need of major overhaul.

If you think you have it “bad” in your competitive space, imagine how a burger joint owner might feel when a McDonald’s opens up next door!

Consider this next question, then, and see if there is a ray of sunshine coming through your windows…

Can a local fast-food retailer develop a successful promotional effort in the face of McDonald’s huge advertising campaign?

The answer is yes, but to be successful it has to be based on differentiation. Additionally, if one agrees that McDonald's has captured a major portion of the mass market, then one would logically be attracted to strategies that would be more easily achievable than simply replacing them or competing head to head, given their now substantial resources.

The USP discussion would inevitably gravitate towards a niching strategy where one could ostensibly bring an amount of resources to bear on a market that is either under-served or unnoticed by the competition. But can you really compete by just making a better burger?

An example would be "5 Guys Burgers", a chain with 331 stores (as of October 2008) that prices its burgers at roughly twice the price of McDonald's. Do you think they are successfully competing? You bet they are, and it’s obviously not with $1 meals or any other low price offerings. They compete by clearly defining their USP as something quite different from the “major” competition. They differentiate themselves by using only high grade peanut oil on their fries. I personally don’t know if that is better or worse than other places, but they flaunt it every chance they get. They serve free peanuts in shells to anyone who wants them. They proudly display cases of peanut oil stacked neatly in their eating areas. They also display huge bags of potatoes and their place of origin. For a burger joint that proclaims the “best burgers available anywhere”, they spend a lot of effort on fries. When you pick up your order, the cup of fries is intentionally overflowing with an extra scoop that falls all over the burgers in your bag, so you feel that you have really gotten a good value.

They have other differentiators as well, but you get the idea. They find a target market that they can reach effectively who will recognize their USP and internalize it into a meaningful UVP^*.

What do you think? Is there a lesson here that you or other business owners can use in examining their value points? If you think going through exercises such as value mapping, SWOT analysis, or framing a USP to your current market conditions are academic drivel best left to a board room; you are missing out on a golden opportunity to not only increase sales, but to actually improve your business by orders of magnitude.

Has this started you thinking? Great! Let me know your thoughts…

--Bob

^{*Unique Value Proposition is how the customer internalizes a business’s value points into personally meaningful benefits. More on that in future discussions...}

© 2008 Best Business Associates LLC