Better decisions, better business

Building a business is a hard job. It feels like a constant race against time. Once you get behind financially it can be very hard to dig out. In fact it takes much more work to “come back” than it does to “stay ahead.” But most companies don’t really know where the bright line is between falling behind and moving ahead.

The real secrete is to understand how the “parts” of the company are working and which ones are struggling. All companies have some parts that are working best and some parts that are in need of improvement. But if you just look at your business as a whole, you will not be able to see where the problems are. In a recent webinar where Gary Pica, CEO of TruMethods and I jointly presented a discussion on profitability, Gary referred to the biggest challenge for owners is finding the “holes in the buckets” where profits are leaking out of the business. All businesses are made up of multiple buckets and if you don’t drill down to look at individual buckets you can’t really tell where the problems are.

Here are 3 common problems:

1. Most companies don’t create financial reports for the parts of their company. By dividing a company into LOBs (lines of business) and drilling into the revenues, expenses, and profitability you can see how each major part is working. Our research shows that approximately 65% of small businesses do not track LOB performance.
2. Most companies don’t separate Gross Margin from Net Income. Gross margin is total revenue minus direct costs (also called cost of goods sold or COGS) – the actual costs associated with generating the revenue, such as the cost of hardware being sold or the cost of labor being billed. Net Income or “Profit” is net income minus overheads – all expenses that are not direct costs. Our research shows that approximately 75% of small businesses don’t separate expenses into direct and overheads and therefore do not really get a gross margin picture, and cannot make good decisions on where to solve problems when costs are out of proportion.
3. Most small companies treat owners compensation as an expense that is designed to minimize taxable profits. This is a totally appropriate treatment for tax reporting, but not for business performance analysis. Performance analysis needs to be done separately from tax accounting. That’s one of the benefits in using the Corelytics Financial Dashboard. It can do the performance analysis without requiring changes in the accounting system which need to organize data for tax reporting purposes. Our research shows that approximately 85% of companies do not separate out owner base pay (a market-based salary) from incentive compensation (incentive compensation should be included in company profit when analyzing financial performance).

It’s hard to get this all done correctly in one step. By using  the Corelytics Financial Dashboard, all of this analysis can be done without having to make major changes to your accounting system. Making changes to an accounting system can be very complex and can do damage to basic tax reporting and basic business accounting.

We will have more analytics to share with you in the months ahead as we continue to evolve our industry metrics. Stay tuned…