Tuesday 28 July 2009

The Importance of Regular Review

The Importance of Regularly Reviewing Your Finances

I was reminded the other day that many smaller businesses struggle
with knowing what financial information they should be looking at
on a regular basis. Some don't look at any financial information,
apart from maybe their bank statement, from one year to the next.
It's kind of a surprise once a year when the accountant takes their
plastic bag of receipts (or perhaps these days a memory stick might
go with the plastic bag!) and two weeks later they sit with their
accountant to find out how they did. Those in that position lack
confidence in whether they have enough money to spend on things for
the business, and they don't know whether they can do things better.

Other owners of smaller businesses lack confidence that they are
looking at the right things on a regular basis.

So here's a simple little checklist to allow you to healthcheck
what information you are looking at on a regular basis. Apologies
to those for whom this is stating the obvious.

First, you need to place priority on keeping the accounts up to
date on a daily basis or weekly basis at the least. If the
information in the accounting system isn't up to date, then the
reports you get out won't be up to date either. So you need your
bookkeeper, accountant, accounts clerks - whoever keeps your
accounts - to regularly post invoices (sales and purchases), bank
receipts and payments on your accounting system.

Second, you need to look at a profit and loss statement every
month, at least. A profit and loss statement (accountants tend to
call it a "P&L") shows your income/revenue and costs in the last
period. One minus the other is your profit or loss for the period.
The reason you look at it as a statement is that it can tell you
many interesting and useful things that you need to know.

For example, you may get a big surprise when you see your gross
margins (gross profit as a percentage of sales revenue) are 40% and
not 60% as you thought. So it prompts you to find out what's going
wrong there. Or you didn't know that someone had ordered a
particular thing and it's cost £1000, so you go and ask them why
they needed it and why they ordered it without telling you. You
can't leave these discoveries until the end of the year!

Just one quick note, because it's not obvious to everyone - make
sure that these monthly P&Ls are done on an "accruals basis". Say
that to your accountant or bookkeeper and they will know what you
mean. The accruals basis really just smoothes out lumpy expenditure
that you pay for in one month, but relates to a different month or
more than one month - so your audit fee that relates to last year,
or your insurance that relates to every month of next year, and so
on.

Third, you need to look also at a balance sheet every month as
well. The balance sheet is just a statement showing what you own,
what you owe and what is owed to you. Looking at it every month
will help you to see trends and start to understand how to manage
your cash better. It'll give you early warning of things going
wrong with your customer accounts, your stock management or bank
accounts.

Fourth, if you are not in a cash or retail business, and your
customers normally get invoices and pay later, then you will need
to keep a careful eye on who owes you what and when it is due. So
get yourself a detailed aged debtors list (aged just means it shows
the amounts owed in age categories depending whether they are
current, overdue, very overdue or extremely overdue). I would
advise looking at the aged debtors list on a weekly basis, and
keeping it on your desk. Know absolutely what is due in the next
week and keep asking your accounts people every day whether it has
arrived. This is the foundation of good credit control, and is
critical to making sure you keep enough cash in the business.

Lastly, for now, you need to think about what other information
would be useful on a daily, weekly and monthly basis. Perhaps you
need to track your sales, revenues, order volumes, gross profits,
production quantities or whatever - the point of getting regular
information on how the business is doing is so that you know about
problems and successes as soon as they occur (and not a year
later!).

Remember, trying to manage the performance of a business without
using regular information is like an athlete trying to improve his
performance without timing himself.

Charis FD is Your Friend in Finance. We help businesses with turnover roughly between £1m and £25m, that have not completely got to grips with the finances. Perhaps they are not making enough money, not generating enough cash, or perhaps the finances are simply disorganised and chaotic. We work with the directors and owners in a flexible and affordable way to take the pain out of managing the finances, so that the business can make more money and be even more successful than it already is.

We work mainly in Hampshire, Thames Valley and Central London at the moment.

If any of the above rings true for your business, we would like to hear from you. Either email us at enquiries@charisfd.com, telling us a bit about your business and your finance challenges, or go to our website www.charisfd.com. On our website you will find lots of information, and also a contact form to get in touch with us.

That's it for this time.

If you have something that you would like us to write about that would help you in improving the finances of your small business, please let us know...

newsletter@charisfd.com

Charis FD - Your Friend in Finance

I hope that you found the New Subscriber series of articles helpful over the last two months. They were designed to cover the full range of issues that form part of our business financial management model, centred on the Business Performance Management wheel. All the areas are designed to help you take control of the business finances and manage the finances intentionally.

The purpose of doing the series, apart from giving you some helpful advice, was to do two things:

Firstly, I hoped to demonstrate that Charis FD has a rational model for business financial management, a model that makes sense and covers all the important challenges that you face in making money in your SME.

Second, I hoped to give you an insight into the role that a Finance Director can play in your business. Many small business owners have built their businesses on their own, and whilst they may have met Finance Directors they don't really know exactly what they do or why they might need one.

There is a common misconception that Finance Directors and Finance people in general are simply "bean counters". They punch the numbers into the system and tell you how much money you are making. But you will have gathered by now that there is much more that they can offer. They can help you to be clear on your strategy, to plan effectively; they can help you decide which actions are worth doing, what changes will add value; they can help you measure and monitor business performance and analyse it in order to help make effective decisions; they can help you manage stakeholders; and they can help to manage risk and put in place an internal control system to help to prevent losses and errors.

But here is the tension that you may be feeling now: You can see where your business would benefit from getting better in all the areas we've talked about. But you don't have the time or the confidence in doing it yourself. But neither do you have enough money to employ someone full-time to be a Finance Director in your business and sort it all out. And, to be honest, it may not be a full time job if your business is in the under-£20m turnover bracket.

If that's what you are feeling, then Charis FD's service may be for you. We specialise in delivering assistance to people like you in a flexible and affordable way. Our service has broadly four levels, depending on your needs and your budget. We can provide you with a programme of assistance, combining telephone and email support with a varying number of days onsite working with you. We could be with you as little as one day per month or as much as two days a week.

Our aim is to give you confidence in managing the business finances, which will lead to, amongst other things, improved profitability and better cashflow.

If you want to talk to us, we're quite happy to give you a call to talk more about your business and the challenges you face. And you may be eligible for a free Finance Strategy Review session. To set that up either email us at enquiries@charisfd.com, remembering to leave your phone number and email address; or go to our website and complete the contact form.

If you want to look back on any of the previous email newsletters we have sent, they are on the Creative Finance & Management blog.

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Internal Control - 3 Fallacies that Add Risk to Your Business

This is the last in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you missed any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

1. The ingredients for success in Finance
2. Strategy and Planning
3. Business Change - implementing your strategic plans
4. Measurement and Management go together
5. Paralysis without analysis
6. Your Finance team - a valued asset
7. Stakeholder management - the importance of keeping people happy
8. Internal Control - 3 fallacies that add risk to your business

Here we go again: ...

Internal Control - 3 fallacies that add risk to your business

Fallacy number one - internal control is boring. Ok, so that's not a fallacy! Internal control IS boring in my opinion. Some of you may even be saying, "What is internal control anyway? Certainly sounds like something boring. Sounds like something that big companies with big auditors might be interested in. But not me!"

No! Please don't switch off, don't close this window and read no further!

Saying that internal control is boring is a bit like a train driver saying that railway tracks, signals and points are boring! He's right, they ARE boring! But if someone doesn't provide those key controls then the train's going to crash. In fact it won't even get going very far.

The same is true in business with internal control. Without controls, your business is going to crash unless it is unfeasibly lucky. So listen up, this will save you much pain.

Fallacy number two - internal control is technical and complex. It certainly can be, but for a smaller business it doesn't have to be.

Internal control is really all about safeguarding the assets of the business, including its cash. And just like safeguarding the assets of your home, mostly it's common sense.

So you could have physical controls, like locks on the premises, access control systems, putting your money in a safe at the end of the day, keeping confidential documents in a locked cupboard, etc.

Authorisation controls are another type of controls. Particularly important when you have employees, these controls just ensure that people get permission from another more senior person (maybe yourself) before they go ahead with something. It may be signing a contract, making an offer to a prospective customer, buying things, or paying for things. Like I said, common sense.

But have you considered that there are certain things that the same person should not be responsible for? These controls are referred to as "segregation of duties", and are mainly geared to avoiding the opportunity for fraud. For instance, if your bookkeeper opens the post in the morning, banks the money received in the post from customers, records the receipt in the accounting system and performs the bank reconciliation, then they have opportunity to make all the right entries in the accounting system but pocket the money themselves. It would take you months to uncover it.

Or another common example: A purchase ledger clerk who is able to set up new suppliers on the accounting system, record purchase invoices and make payments to suppliers, could easily set up a fictitious supplier, record a fictitious invoice and get them paid. Similarly with payroll - don't let someone set up new employees if they are the ones running the calculations and/or making the payments.

There are also review controls and reconciliation controls. These are very important too. Review controls just mean you, or someone senior, looks over something (like a bank statement) to see if they see anything unusual or suspicious. Then they sign it to evidence that they looked at it. Reconciliation controls are really accounting controls. They give comfort that the entries in the accounting system are grounded in facts verifiable from external evidence. Proper reconciliation and review controls make fraud very difficult.

So the simplest reconciliation control is the bank reconciliation. Any person with any experience in finance, from your bookkeeper to your FD, will tell you that this is the most fundamental. In it you are showing that the bank balance showing in your accounts reconciles to your actual bank statement balance. It probably won't agree to your statement, because you may have written a cheque that has been recorded as a payment but not presented by the payee yet. That's why we say that it "reconciles". Reconciling items are adjustments that need to be made to show that the accounts reconcile to the external evidence. If those reconciling items don't make sense, perhaps because they are too old, then something may be going wrong and further investigation is required.

You can do a reconciliation wherever you have external evidence. So the bank reconciliation relates to the bank statement. You can also do supplier statement reconciliations to give comfort that all purchase invoice entries and supplier payment entries in your accounting system are correct.

Fallacy number 3 - it's something to leave to my FD and my auditor. Your auditor may check up on internal control once a year in order to get comfort that they can sign off their audit opinion on your accounts. Your FD (if you have one) is probably the one to whom you have delegated the worry about it.

But internal control, legally, is the responsibility of all directors - with joint and several liability. So it is something to work together on, supporting each other.

The thing about internal control is that it is restrictive. It says to your employees that they have to go through certain hoops before they are allowed to do things, or they have to put a signature on something to say they've done something, or they have to do things a certain way. In a lot of cases, though, employees just want to fulfil their main objective - to make the sale, to finish the batch quickly, to stock the shelves, or whatever. They heave a huge sigh, knowing that Finance has said they have to count, sign, go and get a manager, etc. They may rebel because they can't see the purpose.

I have seen businesses lose lots of money because the directors left Finance isolated in those situations. They didn't see control as a collective responsibility, and they shunted the control issues to the bottom of the management team agenda (which they hardly ever got to).

Conclusion: Internal control is important. I would encourage you to think about what procedures you need to put in place to protect your business assets and cash, and to make sure that all your information is accurate. Listen to the advice of your auditor, accountant and bookkeeper. As the business gets bigger and you delegate more and more authority, the more structured you will need to be.

But please don't write off the issue as boring, otherwise your business will pay eventually.

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Stakeholder Management - the Importance of Keeping People Happy

This is number 7 in an 8-part series especially for new subscribers to Creative Finance & Management. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

Stakeholder management - the importance of keeping people happy

You already know this in all probability, so I will try not to labour the point, but there are many relationships involved in running your business. A lot of them you could call stakeholders. Stakeholders are people or entities that have an interest in your business.

The term is used really to make it clear that businesses do not just exist for shareholders - those who own the business. There are other people and organisations that are affected by and/or interested in the success of the business. They can also affect the success of the business, and you need them on board to help you achieve your vision. So they should be given some attention as well.

If you want examples, stakeholders would be the likes of: customers, suppliers, shareholders, lenders, bankers, employees, local residents, landlords, insurance agents, recruitment agencies, HMRC, pensions providers, auditors, tax advisors, corporate finance advisors, company secretary, non-executive directors, other board members, (maybe the media, your competitors and industry regulators could be others).

Here is another area where you need to be intentional and analytical. Relationships need to be managed. You can't leave them to chance. If you are not managing these relationships right now, why not? Is it because you don't like others interfering in your business? If that's the reason then here's my suggestion for a mindset change - why not see these stakeholders as your teammates, with different skills, abilities, expertise, network contacts, access to funds, wanting your business to succeed and ready to help? Twenty heads are better than one?

And when I say that relationships need to be managed intentionally, I am not saying that you have to be on the phone every week to every single person you identify as a stakeholder. But you have decide intentionally whether you are going to give them any attention and if so, how much and of what sort.

So here's what I think you should do now:

First, brainstorm a list of the stakeholders in your business (and I mean each one, not each category - so each customer and each supplier). Then, for each person or organisation, make a note of:

What do they get out of your business?

Why is your business important to them?

How would you classify their relationship with you (customer, supplier, advisor, investor, etc)? There could be more than one answer.

What do you and your business get out of them?

What else could you get out of them?

How important is this relationship to the success of your business (rate 1 to 10 or High, Medium, Low)?

What is likely to happen if they didn't like you (and on a scale of 1-10 how disastrous would that be for the business)?

What could happen if they liked you more?

How good is your relationship with them (1-10)?

Given the importance of the relationship noted above, how good should your relationship be (1-10)?

What is your relationship strategy for this person or organization (actively develop, regular update on business, mine for leads, no proactive management, etc)?

Finally, there are some stakeholders that are so important that they need extra special attention. Those would be shareholders, customers, lenders, employees, (perhaps some key suppliers and contractors), landlords, bankers and auditors. If they withdrew their funds or their services, or published an adverse comment about your business, you would be stuffed! Perhaps it's worth thinking whether a little bit of extra effort on your part might keep them happy. Perhaps you could give them a little more information than they request, or phone them with an update when they haven't asked, beat deadlines, offer a tour of your facilities, etc. Some things don't cost anything, but they buy lots of goodwill. You never know when you may need them to be understanding!

The next CF&M new subscriber newsletter is the last one, and we'll be looking at internal control - 3 fallacies that add risk to your business.

See you then...

If at any stage you want to talk to us, we're quite happy to give you a call to talk more about your business and the challenges you face. And you may be eligible for a free Finance Strategy Review session. To set that up either email us at enquiries@charisfd.com, remembering to leave your phone number and email address; or go to our website and complete the contact form.

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Your Finance Team - a Valued Asset

This is number 6 in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

Your Finance Team - a Valued Asset

If you have read all the articles that we have sent to you in this new subscriber series, you will hopefully have learnt something not only about managing business performance, but also about the skills and expertise that professional finance people can bring to your business. So I'm actually not going to labour on about the value of finance people and accountants, as the title suggests.

What I am going to do is try to get you thinking about what resources you might need in your Finance function. Perhaps there may be areas you haven't thought of. And if I can help you to get your Finance function fit for purpose then your business performance wheel will turn a lot more smoothly and you will be more successful.

I'd like to think about the Finance function as a set of resources consisting of processes, systems and people. People operate processes, and systems help to facilitate and automate processes. All the elements interact with each other.

Let's think about how Finance functions develop as a business grows, as that may indicate the priority of various elements.

The first thing you ever employ an accountant to do is to set up your company and then prepare and audit its annual accounts and tax computations. This is almost universally true of small businesses - even I have an accountant who does that for me, and I'm a qualified accountant myself!! This is what I would call the compliance requirement.

Above a certain threshold the law says you have to have an audit (if you are trading through a limited company), so you will never get away from a relationship with an external accountancy practice. But you may get to the point where you have the expertise in house to prepare the accounts and save money on their fees! Only the very very big companies have internal tax people, and even they still spend money on tax advice from the accounting firms.

In the early stages you record all the transactions yourself. After a while the business gets too big for you to cope with that, and so you employ a bookkeeper. You also have an accounting system. This is the transaction recording requirement.

In the early days your accounting system may have been a book, a file or a spreadsheet. Then you may have got a proper package like Sage or MYOB. Perhaps you've now got to the stage where you've moved onto something more flexible and with better functionality - like Microsoft AX, Great Plains or Navision.

The key things about your accounting system are that it is there to help you meet both the compliance requirements (holding proper accounting records, and doing VAT returns), and to help you measure your business performance. It becomes a key enabler of your business performance management wheel. If you want information out of it to measure your performance you have to be able to put accurate base data into it somehow. And that's where you need to have a look at the transaction recording processes and see whether you have a problem with GIGO - "Garbage In Garbage Out"!

Back to the growth story... So you're employing a bookkeeper to record transactions in a system, but you are writing the sales invoices yourself and paying your suppliers with your chequebook, your business debit card or through internet banking. At some stage that gets too onerous, so you take on an accounts clerk or two. They take care of the operational finance and control requirement.

So you may now have a Purchase Ledger Clerk recording the supplier invoices and preparing payment runs for you to authorise. You may also have an Invoice Clerk, preparing all the sales invoices to send out. On a part-time basis you may also have a Payroll Clerk or outsource the payroll to a bureau. Between them they could also take care of the bookkeeping requirements, but you may then want an accountant to make sure that all the operational finance, control and transaction recording processes are tied together.

I added the word control in with operational finance to indicate that once you delegate your invoicing, recording and payments, you need to have controls to ensure that people are doing things correctly. This is even more true when you are employing more people elsewhere in the business, since they will need procedures to follow to spend money or commit the business to contracts. I will talk more about this in my eighth article in this series. The point for now is that transactional controls are guarded by the Finance team on your behalf.

By this stage you are normally struggling to get information out of the system to measure the performance of the business if you try to do it yourself. If you are taking note of what I've been saying in previous articles then unless you are a whizz with Microsoft Excel spreadsheets, database queries and pivot tables, you will probably already have an in-house accountant doing reports for you. This is the business performance management requirement.

So you see, whilst I have been talking about business performance management constantly in these articles, I do understand that there is a lot more to the core Finance function. And these core activities need to be managed properly and grow with the business.

Conversely, these weekly articles may have opened your eyes to how much more can be built on your core Finance team in order to help you to manage the performance of the business.

At some stage of growth the business will need a Head of Finance or a Finance Director, a fully qualified accountant with a few years of business experience, to help you manage the full range of core finance (compliance, transaction recording, operational finance and control) and business performance management activities. Has your business reached that stage yet? Have these articles opened your eyes to how much more you should be doing to manage your business performance?

For many businesses there will be a stage where they have a small Finance team and know they need to do more in the realm of business performance management, but they cannot justify the cost of a senior Finance person or think there wouldn't be enough work for a full time role. The fledgling Finance team also probably needs some guidance and direction from someone more experienced.

That's where a flexible service such as the one offered by Charis FD comes in handy. We can provide advice and hands on support in all elements of business performance management, including helping you manage your Finance team, on an ongoing basis. And we can do that by being on site with you anything from one day a month to two days a week or more. Have a look at our website for further details.

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Paralysis Without Analysis

This is the fifth in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

Paralysis without Analysis

Over the last three articles that we've sent to you as part of our new subscriber series we've covered the points around the outside of the business performance management wheel - strategy, change, and performance measurement/reporting. There is one more thing to talk about briefly before moving on to talk about the Finance function (next time) and then other key concerns such as risk, controls and stakeholders. That is performance analysis. I like to call it performance improvement analysis.

If you've read the previous articles in the series you will have picked up the philosophy underlying my advice - be intentional and analytical. Mostly, though, we've talked about being intentional - if you mean business, then you are intentional, you know where you want the business to get to and you know how you intend to get there. And you know whether you are making progress because you are intentional about measuring performance.

Now I want to talk about being analytical.

I started writing something a bit philosophical here at first, and then I heard myself yawn! So I deleted that. Do you want to get under the skin of the performance of your business? Do you see things that are happening and wonder why? Do you wonder which of your products is really the best? Is it the one that sells the most? Do you wonder which of your customers is really the most important? Is it the one that buys the most?

Analysis is all about asking "why?" And "what if?" It can be as basic as "why have we made a loss this month?" Or it could be more complex, such as, "what if we offered early payment discounts of x%?" Or even more complex, like, "what if we paid £xmillion to buy a business?"

It doesn't have to be financial data. Other numerical analysis is useful too. In fact, if you can make it numerical or financial then it is often easier to get a qualitative understanding of the issue - i.e. is it good, bad or ok. One example of numerical analysis that I dealt with in one large group was looking at absenteeism. How many days of work did we lose through sickness? And in which locations? Which teams? Was it seasonal? Was it improving or getting worse? You may be asking, "where is the why question in that?" Well, think about, "why are our staff costs so high?" There are accepted benchmarks around, so we could tell whether the sickness absence rates were better or worse than the average for those types of people. That enabled us to focus on particular areas, ask further questions and put actions in place to improve. Reducing absenteeism eventually led to lower staff costs, because we didn't need as many people to do the work. That's another example of what we saw last time - that measurement enables you to manage and therefore improve.

Analysis enables you to drill right down to cause and effect relationships. The idea is that if you can measure and manage those cause and effect relationships then you can reduce things that drag the business down and enhance things that positively influence the business.

Many big businesses suffer from what they call, "analysis paralysis", which basically means they have gone too far. They have analysed everything and now have so much information that they can't make sense of any of it. Smaller businesses very often suffer from the reverse - "paralysis from lack of analysis"! Have a think about what information you have available in your business. How well do you really understand the cause and effect relationships?

But where do you start? Here's my suggestion: Take a key performance measure, one with strategic importance, and ask, "what would I have to do to make it better?" There may be several things you could do. Get information on what the current situation is for each of them. Then for each of those things, ask, "what would I have to do to make that better?" And keep on going through that cycle until you feel you have got somewhere close to root causes. Along the way you will have analysed your business performance and got valuable insight into the things you have to do to improve.

Here's an example: Let's say that in my business, staff costs represent 70% of the cost base. What would I have to do to make that better? Reduce headcount or reduce remuneration. Let's discount the latter for now. So we should analyse how our headcount is made up - by department, by grade, by location, etc. What would we have to do to reduce headcount in each of those categories? Reduce work or become more efficient. So let's analyse what work the people are doing and how efficient are they - what do they produce and how many do they produce per day, hour, week, month, whatever is appropriate? So with that information, what do we have to do to reduce work? Stop doing certain things - so what would be the impact? And what do we have to do to become more efficient? Do things quicker. So in order to see which things we need to do quicker, we need to analyse what activities have to be done to produce the outcome and how long each activity takes. Then we can look at the main activities and ask for each of them... you've guessed it! "What would we have to do to make that better (or quicker)?"

So to conclude, in order to manage business performance you need to measure it first. But you need to do more than that. You need to understand what the figures are telling you. And in order to understand, you need to analyse - financially, numerically and logically.

But one final word of caution - only measure things that are useful and you can act upon. If you find yourself regularly looking at figures that you do nothing with, then ask yourself what they are for... and if you can't find a satisfactory answer, STOP producing them and go and find some more useful analysis to look at!

In the next newsletter for new subscribers we'll look at your Finance resources - people, systems and processes. Are you getting the best out of them?

Until then, take care...

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Monday 27 July 2009

Measurement and Management go Together

This is the fourth in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

Measurement and Management go Together

"What gets measured gets done!" is often quoted as a truism. The other way I would put it is, "if you don't measure it, you don't manage it". What I want to do in this article is show you the principles of how to apply that to managing the performance of your business. You do want to manage the performance of your business, don't you? You know that if you don't manage performance then your business will almost certainly underperform?

I've tried to say in the last three new subscriber newsletters that you have to be intentional in managing business performance, or in managing a business in general. If you want your business to perform well, you have to know and specify what you want it to achieve and have defined strategies for achieving those goals. You should also have given yourself targets for what each of your strategies should achieve.

But you can do all that and still not succeed. One of the main reasons that happens in smaller businesses is that they don't check regularly to see whether they are succeeding or not. They don't measure the outcome of their strategies, or at least not regularly enough. It's no use getting to the end of the year when the auditors come in, or when you sit down with your accountant, to find out that you haven't grown your business as much as you wanted to, or you spent too much. It's a bit late then. You need to measure outcomes monthly, weekly, and daily in some cases.

Getting into the nitty gritty for a minute, the basic financial performance reports you need to have on a monthly basis are the income statement (or "profit and loss account") and the balance sheet.

The income statement should not be in so much detail that you can't see the wood for the trees, but should be in enough detail to see where your money is coming from and where it is going to. For example, if you sell the same small set of products to a few regular customers, then show your income by customer or customer group. On the other hand if you have a varied product set you may want to show your income by product. This depends what your marketing and sales strategies are - segment your income in the same way you segment your sales for strategy purposes. Then you can see if your strategy is making any difference.

Similarly you will want to show your costs in the income statement in a way that makes sense. You may show them by type (e.g. premises, people, insurance, IT, etc) or by department (e.g. operations, sales, finance, IT, HR, etc) or both. It depends how complex your department structure is and how you manage your business.

The balance sheet shows the value of what the business owns, what it owes and what it is owed. It is useful to see particularly the cash balance, the debtors balance (what your customers owe you) and the creditors balance (what you owe suppliers).

But this is just the basic level. Every business should do those without question. You need more. If your strategy is targeting increasing sales, then you must also get more detailed reports on sales. If your sales cycle is less than a month, then perhaps you should be getting sales reports weekly or daily. If your strategy depends on production quantities and operational efficiency, then perhaps you need daily or weekly reports on those things.

And again, don't just look at financial performance. Performance measurement and management are much broader than that. If you are a service business, perhaps you need to measure that utilisation ratios for your consultants (time spent generating revenue divided by time available). If you have a long sales cycle, perhaps you need to get weekly or monthly reports on leads generated and sales pipeline reports. If these things are critical in your strategy to achieve your vision for the business, then you can't manage them properly without measuring how you are doing.

To sum up, what are the key things to think about in performance measurement and reporting? What, how and how often - those are the three key questions. What to measure will depend on your strategy, the things you are doing that are important to getting the business towards achieving its vision. How to measure it will have to be thought through carefully - it could be a figure, a ratio, a traffic light, a pie chart, etc. How often will depend on how often things change. You want to be able to make decisions and adjust your strategy and tactics on the basis of what the information is telling you, so the information has to be timely.

Finally, all this measurement will be worth nothing if you don't use it, if you don't make decisions based on the information. No strategy is perfectly infallible. The information you get may tell you that you are not quite getting it right. If you are learning from the reports you get, you will investigate further and tweak or change your strategy depending on what you find. This the feedback loop complete. The business performance management wheel that I talked about in the first of these articles depends on completing the whole cycle - develop your strategy, carry out your strategy, measure your performance and learn from the information to develop your strategy... and so it goes on.

I'm worried that this all sounds complicated, because I've condensed so much into a short space. If you do a healthcheck on what you actually do at the moment, I think you will find that you already do some of this, but it may be ad hoc, disjointed and disorganised. As with other areas, putting some thought into it and having a rationale for measuring things about your business will get you a long way forward. Just the act of being intentional about performance measurement is big progress.

The final thing I would say is that this is probably one of the areas that someone like a Finance Director would add the most value. They are skilled in pulling numbers together and in interpreting what they mean for the business. If you haven't got anyone like that in your business, then give it some thought. And it doesn't have to be full-time headcount. There are part-time options available, which are more affordable for smaller businesses - one of these options is Charis FD's own services. That's a gentle plug for my business, but I think it's appropriate. See our website for more details.

If you are worried about the cost of such a service or the cost of taking on a full-time FD, think of it in terms of the financial benefits it could bring. They would work alongside you, helping you to put in place the finance and performance management disciplines we have been outlining over the last few weeks. So I would be surprised if following all this advice with help could not help to improve your sales by more than 5%, or improve your gross margins by more than 5-10%, or your net profits by 10% - especially if you have not employed one before (either full-time or part-time). If you look at it that way, it doesn't seem so expensive. That's obviously not making any promises, but it's food for thought!

Why not contact us today?

Until next time...

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Business Change

This is the third in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

Business Change

One of the areas where Finance professionals can probably add the most value is around business change. They bring control and ensure that you go into the change with your eyes open, and hopefully if you listen to their advice they can help to ensure you only implement changes that will benefit the business.

First let's start by defining "business change". Thinking back to the last new subscriber newsletter, business change is just a type of strategy for the business. Business change is simply changing the business in a big way. Strictly, I suppose, you could apply everything we are going to say to small changes (recruiting an extra person or buying a new PC) as well as big changes. But normally when we talk about business change we are talking about something that has a big impact. So it could be the acquisition of a new business, the introduction of some automation into the manufacturing process, the implementation of IVR on the phone system, buying a building, implementing a new accounting system, selling part of the business, restructuring programmes, closing a factory, opening a new shop, and the list could go on.

My point about business change is somewhat similar to my point about strategy last time - I can't stress enough the importance of being intentional and analytical. You may laugh at me at this point and say, "how can I buy a business or implement a new system without being intentional? I can't imagine ever saying, 'Oops! I accidentally just bought a business!'" Well, that's not exactly the point I'm trying to make.

The point about being intentional is because sometimes people suggest changes because they just feel like a change. It happens in both big and small companies. In big companies, the CEO might say, "I think we need an SAP ERP system, or a Siebel CRM system." In small companies, the owner may say, "I just feel that we need some really nice offices." Now in both cases there could be good reasons for wanting those things, but I've shown them bluntly to illustrate that it is perfectly possible that it's all down to vanity! The big company CEO may want to get those words on his CV, the small company owner may just want to feel more successful.

In one business I worked with I once heard an acquisition referred to as, "a triumph of vanity over sanity!" That was because the company paid too much to buy the business, so that it would take years to make a positive return on investment, but everyone had to admit that it looked good for the chairman/CEO, who was also the majority shareholder. If your business vision is to build your ego, rather than your business value and bottom line, then that type of acquisition is fine! That might sound sarcastic, but I'm actually being semi-serious. If you realise that a change project is not going to deliver any benefit to the business, but you want to do it anyway because you want the Kudos, then at least you are going into it with your eyes open. The people I have a problem with are those who try to fool themselves and everyone else that their project is really beneficial.

Ok, so what is the right approach?

Being intentional is about making strong links between what you are trying to achieve in your strategy and vision and the change you are proposing to make. The best way to do this is to write down benefits statements briefly in bullet points in the format, "one of our strategic issues is "; This project "; The benefit is ". If the benefit does not address a strategic issue, then why are you doing it? If your project is really addressing strategic issues in your business, then you will have no trouble writing down these benefits statements. If you do struggle then that should ring alarm bells.

Being analytical is objectively assessing whether the benefits will outweigh the costs. Sometimes this is where the frustration comes, when you discover that something you want to do is actually going to financial damage the business. The project may have so many benefits, but not enough to justify the cost and the impact on the bottom line. I admit it is frustrating. But it's better to identify this before you start, then you won't waste your time as well as your money!

As an example, I once worked with a very large company with nearly 40,000 employees. For two years the HR Services team had been managing annual bonus and pay review calculations through a suite of spreadsheets, while at the same time the business had been recruiting more and more people onto new contracts with bonuses. So their problem was only going to get worse. What the team proposed was an expensive off-the-shelf system. It would definitely save time and therefore money (not having to employ temps to do the spreadsheets), and reduce the risk of error, but when we analysed it the savings did not outweigh the costs, even over a 5-year period.

In that case I had to say no to them, but I also suggested that they talk to the IT team to see if they could write some visual basic to automate their spreadsheets. It wasn't the nice shiny built-for-purpose system they wanted, but since it was a fifth of the cost of the initial proposal it clearly then gave the benefits we needed at a cost we could afford.

Lots more could be said, but let's leave those things for future CF&M articles! In conclusion, be intentional - be really clear that the change you are proposing is addressing the biggest strategic issues you have identified. Also, be analytical and objective or realistic - set figures on the benefits and the costs and see if one outweighs the other over a period of time (say, five years).

Final word, just in case you haven't come across the term before - the benefits statements, and the analysis, are the main parts of what is normally referred to as a "business case".

All the best!

Until next time...

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Strategy and Planning in Business

This is the second in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

1. The ingredients for success in Finance
2. Strategy and Planning
3. Business Change - implementing your strategic plans
4. Measurement and Management go together
5. Paralysis without analysis
6. Your Finance team - a valued asset
7. Stakeholder management - the importance of keeping people happy
8. Internal Control - 3 fallacies that add risk to your business

So, ...

Strategy and Planning in Business
I guess the first thing you may be thinking is that you don't need fancy strategies in your business, because it's so small, so why should you bother with this article. Surely you just keep working hard and you'll make more money without going through pointless navel-gazing exercises to come up with strategies!? Well, I'd kind of agree with you that you don't need FANCY strategies, but in reality every business has strategies whether it consciously acknowledges them or not. So wouldn't it be better to choose those strategies intentionally than to drift into them?

It's all because the word "strategy" sounds a bit technical, something that generals do in wars when they have to organise lots of soldiers. It has connotations that sound big. But that need not be the case. Really a strategy is just a specified approach to overcome a problem or achieve an aspiration. And each strategy can have a number of activities within it that can be planned specifically.

So if you have a problem you want to overcome or an aspiration you want to achieve, then your approach to doing that will be your strategy. So you see that we all have strategies, even if your strategy to date has been to "wing it"!

One of my philosophies is that if you want to get anywhere with anything you have to be intentional and analytical. Being intentional is my point for now. For example, when I am trying to coach my son in how to get better at playing football I often tell him to be "intentional". In other words, don't just stand around on the pitch waiting for the ball to come your way, and when it does come your way don't just swing your foot at it and hope for the best! You must have a reason for being where you are, to gain an advantage for your team, and when you kick the ball you must know where you want it to go.

It's exactly the same with business strategy. You have to be intentional. And it doesn't have to be fancy and complex. Just have an intention. Because if you have an intention, it means you must have thought about it and have a reason for it.

Hopefully I've persuaded you that even if you have a small business you still need strategies. In the remaining space let's have a look at what you need to develop good strategies.

First, you need a "vision". A vision is simply a statement of where you want the business to get to. What's your dream for the business? How much profit? How much turnover? How big a valuation? Market share? Being number one? Even a one-man business has a dream. I know I do. But if you are going to be intentional you need to be specific about all the things you want the business to achieve.

Second, you need to know what the "strategic issues" are. Strategic issues are the barriers and challenges to be overcome or met in trying to achieve the vision. And to know what these are you have to be analytical. You have to gather facts and be honest about the market, the competition, your customers, your suppliers, the economy, and many other things. I know that small businesses often don't have the time and resources to gather all the information they would like, but mark my words, the more information you have the better equipped you will be.

Third, you need "strategies" to address the strategic issues. And to decide on strategies you may have several options to consider. Being clear about your vision and the strategic issues enables you to weigh up each option on its merits. Does this particular option address the issues completely or partially or not at all? Does it help with more than one strategic issue?

Fourth, each strategy needs a "plan". In order to successfully carry out a strategy you need to plan it, so that you know what needs to be done.

Last point - write it down and make a record of your vision and strategy. I wish I could remember where I heard this, but there was some research done on some graduates and whether they achieved their dreams. A much higher percentage of those who wrote down what they wanted to achieve did achieve their dreams. They had something to go back to and remind them what they were supposed to be focussing on, something to measure their performance against.

If you haven't ever thought of any of these things, why not have a go at jotting something down? Sure, there are coaches that can help you and courses, seminars and workshops that can give you more guidance and depth (and I would definitely recommend these things if you can afford them), but in my opinion you can get a long way by simply being intentional and analytical and ensuring that all your plans link through strategies to your vision.

All the best!

Until next time...

If at any stage you want to talk to us, we're quite happy to give you a call to talk more about your business and the challenges you face. And you may be eligible for a free Finance Strategy Review session. To set that up either email us at enquiries@charisfd.com, remembering to leave your phone number and email address; or go to our website and complete the contact form.

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

The Ingredients for Success in Finance

This is the first in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we will send you an article aimed at helping you think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter.

Why are we doing this? Well it's certainly not because we want you to be overloaded with spam! This email is NOT spam. You received it because you consciously signed up to receive our Creative Finance & Management newsletter. But, hey, we know that even some newsletters you consciously sign up to might as well be spam!

So why are we intent on sending you twelve emails in the first two months of your subscription? The answer is that I looked at the newsletters that were queued to go out and tried to think what it would be like to simply start getting them at a random point. It would feel like pretty random subject matter, without a framework or rationale. And I felt that it would probably be useful to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

The ingredients for success in Finance

First of all, let's recognise at the outset that there are many things that can be said about making business successful. That's why I'm confident that I am unlikely to run out of subjects for the Creative Finance & Management newsletter! But after careful reflection on all that I've learnt over my 18-year career in accounting, finance and business, I believe that the financial and performance elements boil down to seven or eight things.

Now I admit that there are academics out there, as well as big management consulting firms, who have researched and pondered and discussed and head-scratched over many years, and they have written big books on topics such as these. And they have probably come up with other ways of looking at things, perhaps even better. Who knows? I am just someone who has looked at what I have learnt over the last 18 years, in my training, courses I've attended, as well as reflections on the work I've done, and pulled it all together in a coherent way.

So "take it or leave it" is what I'm saying. I have no desire to be seen as any kind of finance and management guru. I simply want to help small businesses do things better.

So what are the ingredients for financial success? All I am going to do in this article is lay out the scenario and describe the model. In the next seven articles I will explain the important parts of the model and how applying these principles can help your business to become financial stronger and more successful.

The way I look at it is like a wheel, with a hub, and a couple of other things. I call it the Business Performance Management Wheel. If you go to the Our Services page of the Charis FD website you will see this illustrated and described. There are four points around the outside of the wheel:

Strategy and Planning

Actions and Change

Performance

Performance Reporting and Review

Those elements are linked with a directional arrow, indicating that actions and change result from strategy and planning, and contribute to business performance. Then you have to review the performance of the business through regular reporting in order to feedback into more strategy and planning.

In the middle of the wheel is "Finance", which should probably be more specifically "Finance Resources". Finance resources keep the wheel turning, providing information and control.

Around the outside of the wheel are two elements:

Stakeholder management; and

Risk management and compliance.

Those are two things that provide the environment for business performance management.

I should also say that there are other dimensions. So cash/working capital is a dimension that has different implications depending on which of the elements you are thinking about. Profit is another dimension. And Performance is a generic term that includes profit, but does not exclude any measure of success in your business.

Over the next few weeks in these introductory newsletters we will take each of the seven elements in turn and outline what the key elements are in getting the business performance management wheel turning smoothly for you.

First, next week, we will look at strategy and planning. Where does strategy come from and how do you decide what your strategy should be? If you don't have strategies for your business and plans for achieving your strategic objectives, then you are leaving too much to chance and your business will underperform.

Second, we will discuss business change. Sometimes it feels like there are so many options for useful projects you could do, or things you could change, but you can't do everything all at once. So how do you know which of the options will be best to choose?

In the third week we see that measurement and management go together. If you want to be able to manage your finances, or your business performance in general, then you have to regularly review measures of performance. This is an area many small businesses need help with.

Fourthly, we talk about the "paralysis without analysis". A lot of big companies talk about "analysis paralysis", meaning they have so many figures, so much management information, so much analysis of figures, that they don't know how to digest it all. Smaller businesses are often paralysed by the opposite problem. They don't know what to analyse and have very little management information and modelling. What things are most useful? Where should you start?

Fifth, we'll talk about finance resources. Finance resources is the term I use to encompass finance and accounting people, as well as systems, processes (and perhaps even cash!). Your finance resources are there to support you in managing your business to optimum performance, providing information and control, as well as expert advice. So that fifth article will tell you more about what you should expect from finance resources and how to get the most out of them.

Sixthly, stakeholder management gets a mention. Stakeholders are anyone who has any interest in your business. Shareholders and investors are the people we normally think of first, but the list gets longer the more you think about it. There are a host of people and entities that should get your attention as stakeholders in the business, and good relationships with them will smooth the way for growth.

Finally, we snooze through 700 words on internal control. I'm joking! It's very important! But a lot of people see internal control as something boring and tedious. So we'll consider three fallacies that add risk to your business in the realm of internal control.

Until next time...

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Creative Finance & Management

Tuesday 28 July 2009

The Importance of Regular Review

Charis FD - Your Friend in Finance

Internal Control - 3 Fallacies that Add Risk to Your Business

Internal Control - 3 fallacies that add risk to your business

Stakeholder Management - the Importance of Keeping People Happy

Stakeholder management - the importance of keeping people happy

Your Finance Team - a Valued Asset

Your Finance Team - a Valued Asset

Paralysis Without Analysis

Paralysis without Analysis

Monday 27 July 2009

Measurement and Management go Together

Measurement and Management go Together

Business Change

Business Change

Strategy and Planning in Business

The Ingredients for Success in Finance

The ingredients for success in Finance

A valuable offer from Charis FD

Charis FD Links

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