Benchmarking 102: Prioritizing Benchmarks

In a previous blog, we learned WHY benchmarking is so important. Here’s a brief refresh:

  • It helps you understand your situation.
  • It can be used continually. Benchmarking is not a use it once and pitch it solution.
  • It provides you with real-time data. That is, as long your data is accurate, timely and relevant.

So now that we’re all up to speed, let’s revisit benchmarking again. After securing the accurate, timely and relevant data source you’ll use, the challenge becomes choosing which benchmarks to analyze and use as a proxy for business success.

Different industries, even different companies within an industry, could have different measures of success. For example, a contractor may have large subcontractor expenditures. Are these expenses normal considering the contractor’s sales volume?

Rather than define all these industry-specific key performance indicators (KPIs), we’re going to focus on a few financial metrics that are the most universally important to business and, when analyzed together, provide a quick and high-level review of a company’s health. Get excited.

  • Net Profit Margin. Generally expressed as a net-profit before taxes in a given financial period divided by sales. Another way to look at it is how many cents of profit you extract from each dollar it earns in revenue. This may be a rudimentary financial metric, but it is also the most important!
  • Liquidity Ratios. Did you note the plural usage? Good because there are two that need to be analyzed jointly.
    • Current Ratio is expressed as current assets divided by current liabilities. This metric shows your general liquidity, however it has some limitations. By including inventory in the calculation, it may provide a distorted understanding of your very short cash flow.
    • Quick Ratio is typically expressed as cash accounts receivable divided by current liabilities. Again, this ratio may not be perfect for gauging liquidity, but it is a useful and popular comparison to pair with the Current Ratio.
  • Turnover Ratios. Plural again … because there are three this time to consider:
    • Accounts Receivable (AR) is expressed as accounts receivable divided by sales, multiplied by 365 days. It roughly measures the number of days your company takes to turn accounts receivable into cash. Lower numbers are more desirable since it is better to have cash in the bank than extra receivable on the books.
    • Accounts Payable (AP) is expressed as accounts payable divided by cost of goods sold, multiplied by 365 days. The accounts payable ratio indicates the number of days you take to pay its vendors. Here, higher numbers are better as it means you are able to hold onto cash longer.
    • Inventory Days is expressed as inventory divided by cost of goods sold, multiplied by 365 days. Inventory days measures the number of days it takes to sell off inventory. As a note, this ratio is very specific to the industry. Imagine how long wine is stored at a winery compared to how long eggs are on grocery stores shelves. Generally, lower numbers are better.

By using some of these financial metrics repeatedly, you can being to build a picture of where your business should be going, where it’s excelling and where you can change and improve.

Takeaways from #SWNDWomen

Last weekend we were honored to be part of North Dakota Women’s Startup Weekend. There was so much inspiration and innovation. From hydroponic technology to help end the obesity crisis to jingles for your loved ones and more, it was a truly engaging weekend. For the full scoop on the projects and winners, check out Emerging Prairie’s recap.

Here a few of our takeaways from Sunday’s final presentations:

The need for good people. We’re not going to lie. We can’t imagine how stressful and exhilarating it must be to put together a startup in 54 hours. It probably helps when you have good people on your side to help you make your dream a reality.

The same can be true for any startup (not just those built in a condensed timeframe). “The number one difference in the success of a startup is people,” said speaker Mari Baker (learn more about her here). “A good hire makes all the difference in the world.”

Build a culture, not just a business. Yes you have to have a product or solution. Yes, you should probably have a business plan so you know where you’re attempting to go. Yes you should have an understanding of your finances.

But you also need to have culture in place to help drive your company. “Culture trumps strategy every time,” said Baker. It’s important to put it in place early on so that as your startup grows, you don’t lose sight of who you are at the heart of your company.

Don’t forget about YOU. You’ve put a lot of time, effort, blood, sweat and tears into this dream of yours. You’ve worked hard. But along the way to seeing your dream become a reality, don’t lose sight of YOU. According to Baker, one of the keys to success is being able to take care of yourself first. She likens it to the security talk on an airplane: put your oxygen mask on before helping others.

Further, know where your strengths are … and where they’re not. Come on, no one is perfect. Identify areas where you have weaknesses and hire people who have strengths in those areas. A well rounded team who has the ability to learn, adapt and adjust along the bumpy startup way is key to success.

And a few more …

  • Fail fast.
  • Life ebbs and flows. Try to achieve balance over time.
  • Always ask: Who are the smartest people? Work with them.

 

Cheers to everyone involved in _SWNDWomen

 

 

 

Tips for Hiring (& Keeping) Employees

One of the fun things you get to do when you run a business is hire staff. After all, without them you can’t grow to the level you want, unless you like wearing multiple hats all the time. While it’s great to watch your team grow, hiring new employees can be a frustrating and grueling process.

We’re here to tell you that it can be easier … well, at least a little bit.

Background Checks

You’re growing and you need help NOW. So you hire the first person that walks in the door with a halfway decent looking resume right? Wrong. Without doing some due diligence (not just an accounting term my friends), you can end up in a world of hurt.

Welcome to the world of negligent hiring, a fancy legal term that breaks down like this: if you don’t do your due diligence (which includes background checks), you are responsible for the destructive actions of your employees.

But background checks do more than just protect you legally. They can give you valuable information, such as:

  • Verify information on a resume
  • Assure a candidate is qualified for the position
  • Obtain criminal information

Placement Services

Need to hire but don’t have the time or resources to make a hire? Placement services can help you, essentially acting as an HR and recruiting department. This process involves meeting with management, searching for qualified candidates, screening candidates and recommending a candidate for hire. In other words, it takes a whole pile of stuff off your to do list.

Shameless plug: Eide Bailly has placement service capabilities. Plus, we’re really fun to work with.

Fraud Hotline

You have the employees, but you want to ensure things are running efficiently and there’s no sketchy business going on. Utilize a fraud hotline. Fraud hotlines allow individuals to anonymously report wrongful behavior and allows employers to have insight into what’s going on in their organization, even when they’re not present.

These are just a few of the ways that you can hire the right people and continue to maintain the vitality of the organization you dreamed of running. Human resources is essential to your organization, but it can also be tiring, especially when it’s one of the many things included in your job description. So before you try and do it all yourself, consult with a business advisor … they may just be able to take some of the work off your plate (we sure can).

A version of this post first appeared on Eidebailly.com.

 

 

 

Your Financial Cast of Characters

Your finances tell a story. It’s an intriguing and exciting one (trust me, it really is). Within that story there are different characters, each of whom play a different role. Sometimes these are all the same people. If you’re lucky, you get to work with more than one number nerd day-to-day.

It’s important to understand each of the characters in your financial story. Just as each founder or CEO is not the same, neither are the financial individuals in your organization. They each have a special skill set and way of thinking, but all can contribute to the overall success of your organization.

Chief Financial Officer

This is your top level financial person. They’re responsible for oversight of your finances, as well as strategy for your business. Read, you want them on your side as you map out long-term growth and eventual exit. They can help you see big picture while managing the day-to-day.

Roles include:

  • Supervisor – A CFO oversees the administrative accounting functions/processes to ensure they are running smoothly (yes, there are different types of accounting functions).
  • Planner – A CFO keeps a watchful eye on the inflow and outflows and provides you with the information you need to make decisions surrounding investments, purchases, next steps, etc.
  • Interpreter – A CFO helps you understand the numbers in a meaningful way. In other words, it’s part of their job to help you get it and understand why it matters.
  • Navigator – A CFO helps guide your business toward strategic growth, identifying areas of improvement, as well as any threats that may be lurking around.

The CFO is essential to the story of your business because they oversee a crucial aspect of you being in business (cough money). They also help you understand your business and its strengths/weaknesses and how to leverage those strengths and improve the weaknesses in order to achieve what you’ve set out to do.

They are big picture thinkers (hence why we keep using the word strategy). They are not responsible for day-to-day task related financial work. That falls to our next few characters.

Controller

This is the individual who is responsible for overseeing the day-to-day task related financial work. Their main role is oversight of the company’s finances, ensuring their timeliness and accuracy, as well as responsibility for the accounting department team.

Responsibilities of a controller will include:

  • Accounting system set-up and maintenance
  • Financial statement preparation and reporting
  • Bank and credit statement reconciliation
  • Oversight of the accounting staff, including supervision and training
  • Budgeting
  • Procedure documentation
  • Payroll
  • Accounts payable and receivable
  • General ledger maintenance
  • Tax compliance

The controller is the gatekeeper of the financial information, bridging the gap between data entry (coming up next) and strategy.

Bookkeeper

We have now arrived at our final character in your accounting journey: the bookkeeper. This person is essential because they complete the day-to-day task related work.

Their responsibilities include:

  • Everyday business transaction processing
  • Task related reporting (such as sales tax, payroll, etc.)
  • Maintenance of supporting documentation (such as invoices, bills, receipts, Form W-9s, exemption certificates, credit applications, etc.)

A bookkeeper is like a storehouse of information about your business. They know things like chart of accounts, procedures related to functions such as accounts payable and receivable, maintain invoices and more. They are not however, expected to make strategic business decisions based on this information.

So who do you need?

Each of these characters supports a specific role in your organization. But as a small business or startup, you might not have the finances necessary to hire all the financial people (ironic isn’t it).

Here’s the good news: you can outsource a lot of this at a relatively low cost until you’re at the stage where you’re comfortable moving it in house.

What’s important is to know the importance (and necessity) of understanding your finances and your financial journey. Then find a trusted business advisor, or advisors, to help you along the way.

Don’t Take Our Word for It

We love helping you dream about what’s possible when you don’t have to work in the day to day operations of your business.

But don’t take our word for it. Mike even says that we make numbers kind of fun. Seriously, check it out!

Dare to dream about what’s possible … we’ll be here to help you every step of the way. #ebPossible

Something to Brighten Your Tax Day

NOTICE: Taxes are due today!

Hey, wait…isn’t tax day April 15th? Come on numbers nerds, get with the program.

Well, in most cases, you would be correct. Normally the most awesome day of the year is April 15. But this year is special. Why? Because this year Emancipation Day was observed on April 15th by the District of Columbia and therefore tax day was moved to April 18th.

That means you were given a few extra days to file your tax return or extension (you still have to pay though). But who needs the extra days right? You’re already on top of it, we’re sure.

In honor of tax day, we thought we could take a break from the normal content and spread some laughter with some of our favorite tax humor. Enjoy!

The hardest thing in the world to understand is the income tax. – Albert Einstein

How do you tell an introverted accountant from an extroverted one?

An introverted accountant stares at their shoes, an extroverted one stares at yours

What’s the difference between an accountant and a lawyer? The accountant knows he’s boring.

Woman goes to the doctor and finds out she has 6 months to live. Her doctor advises that she marry an accountant.

Woman: Why marry an accountant? Will that make me live longer?

Doctor: Well… no, but it sure will seem longer!

Why was the accountant so excited on the weekend? Because he gets to wear casual clothes to work.

Understanding Your Financials

financial statements

Running a business full time is a lot of work. Not only are you running the company, you’re attempting to keep employees happy (if you have them), trying to get the word out about your business, and on top of that, trying to manage your finances. Who has time to truly understand the financials and what they mean?

We think understanding your financial statements is key to effectively running your business and making smart decisions. Your financial statements can shed light on areas of your business and can help you identify areas for growth and for improvement.

Your financial statements tell the story of your business, where it has been, where it currently sits and where it’s headed. Don’t believe us? Here are a few examples of things your financial statements can tell you.

The balance sheet tells you about the resources (or sometimes lack of resources) in your business. This financial statement is measured at a point in time (as compared to a period of time). Here are some of the measurements the balance sheet is responsible for telling you:

  •  How much cash do you have?
  • What is the net book value (NBV) of any property and equipment you are holding for business use? NBV…that is the original cost less depreciation.
  • How much do people owe you? How much do you owe others?
  • How much is left in your business after all your liabilities are taken care of (a.k.a equity)?
  • How much of your business is financed by long-term debt versus financed by you (or any partners you might have)?
  • Speaking of long-term debt, what principal portion of that debt is due within the next year?
  • What is your ability to pay your current liabilities with current assets (aka working capital)? No so fast, what’s makes them current? Typically current liabilities and assets are those that are expected to be paid or consumed (or received in the case of accounts receivable) within the next year.

The income statement tells you about the profitability (or again sometimes lack of profitability) of your business. This financial statement is measured for a period of time, such as a month, quarter or year. Here are some of the measurements the income statement is responsible for telling you:

  •  What was the gross margin for the period (gross income – cost of goods)?
  • What were your operating expenses for the period?
  • What was the net income for the period (gross margin – operating expenses – other income/expense)?

In addition if you are tracking your income and expenses by profit centers (ex. job, department, product line, etc.), you would be able to see all of the above measurements by those profit centers. This is especially valuable as it helps determine where you are making money or losing money.

The statement of cash flows tells you about the sources and uses of your cash. In other words where did it all come from and where did it all go?

Now the really good stuff…

You can take your financial statements to the next level by comparing your current performance against historical performance, benchmarking yourself against your industry and peers, and projecting your future performance.

  • You against you…viewing your financial statements historically allows you to see changes in balances and trends in your performance (good or bad).
  • You against the industry….viewing your financial statements against industry data or standards allows you to see how you stack up. Where are you better than the industry or where can you improve compared to the industry?
  • Projecting your future…projecting where you see yourself financially can be a valuable tool in budgeting your expenditures and managing your business. The most valuable projections are done on a rolling basis, meaning the projections are changing as your business changes. Projections that are only looked at on an annual basis do not provide as much value.

To wrap it all up, financial statements provide a wealth of information for you to make more informed decisions about your business. Knowing and understanding where you stand financially can mean the success or failure of your business.