Setting up for Success: Part 2

Welcome to our “Setting up for Success: Part 2” blog post. Part one focused on selecting a basis for your accounting and determining what information you need to track in your business.

Now that you understand what you need to track, how do you track this important information?

You can start by developing your chart of accounts. We know what you’re thinking: “develop my what?!”

Your chart of accounts is a listing of accounts that are needed to prepare financial statements and reports. A typical structure looks like this:

1000-1999 Assets

            2000-2999 Liabilities 

            3000-3999 Equity

            4000-4999 Sales

            5000-5999 Cost of Goods Sold (COGS)

            6000-6999 Operating Expenses (General and Administrative)

            7000-7999 Other Income and Expense

            8000-8999 Income Tax Expense

Account numbered 1000-3999 are used in preparing the balance sheet, while numbers 4000-8999 are used in preparing the income statement, which focuses on profit and loss. Of course, the number of individual accounts within each category will depend on the specific needs of your business.

A good rule to keep practice is to try to use the least number of accounts to attain the financial information you need, and structure it for growth.

What do we mean by growth? Let’s take a closer look at the assets section:

1000 Petty Cash

            1005 Checking

            1010 Savings

            1100 Accounts Receivable

            1200 Inventory

            1300 Prepaid Expenses

            1400 Fixed Assets

            1450 Accumulated Depreciation

You probably noticed the account numbers aren’t in sequential order. This allows for room for growth in your business.

You can also use the chart of accounts to track different jobs, departments, segments, etc. For example, maybe your business has locations across the Midwest in Fargo, Minneapolis and Sioux Falls. You want to be able to see how profitable you are at each location. You can track each location by assigning a division number, such as 01-Fargo, 02-Minneapolis, 03-Sioux Falls, and then attaching each division number to each of the accounts, like this:

            4000-01 Sales

            4000-02 Sales

            4000-03 Sales

            5000-01 COGS

            5000-02 COGS

            5000-03 COGS

Now that you know what information you need and how to track it, you can select an accounting system to help you track and keep information in order.

There are two options for tracking your information: manually or electronically (think desktop or cloud based). While there is no right or wrong way, computerized accounting is usually more efficient, which is leading to manual accounting becoming a dinosaur in today’s accounting world. Cloud based accounting also gives you the freedom to access your information anytime, anywhere. Who doesn’t love simplicity and accessibility?

It’s important, as always, to remember that each business is different, so accounting systems usually aren’t one size fits all. Doing your research and truly understanding your business’ needs can help you select a system that gives you the best possible results.

If all of this seems overwhelming, fear not. We have the resources and talent to help you design an accounting system that can set your business up for success.

Setting up for Success: Part 1

You’ve decided to start a new business – how exciting! There are many important things to consider when getting everything set up, such as your human resources policies (your employees matter!) and software and solutions (you want everything organized and running smoothly). Another important component you need to consider is your accounting – after all, these numbers lay the foundation for your business and essentially tell your story.

Accounting is an important part of your business, and getting it right the first time is crucial. So where do you even begin?

First, it’s important to understand your business and industry. This understanding can help you answer some important questions for designing your accounting system. Some of the questions that may come up include:

  • “What basis of accounting should I be using?”
  • “What information should I be tracking in order to make informed decisions?”
  • “I know what I want to track, but how do I track it?”

Let’s start with the first question: selecting your basis of accounting. Your basis of accounting is essentially a framework used to record your transactions. There are a few different types to choose from, with the following being the most common.

  • U.S. GAAP (United States Generally Accepted Accounting Principles) – Try saying that one ten times fast. This is an accrual based framework in which revenues and expenses are recorded when they are earned and incurred, respectively. This is the most commonly recommended type.
  • Cash Basis – In this framework, revenues and expenses are recorded when cash is received or paid, respectively. Cash basis presents two different methods of accounting: pure and modified. The difference comes in that under modified cash bases, some transactions follow U.S. GAAP. Check out this blog to learn more about cash versus accrual methods.
  • Income Tax Basis – This is a framework in which revenue and expense recording depends on tax regulations. This helps eliminate the need for converting from one basis of accounting to another for tax return purposes.
  • Regulatory – In this framework, a regulatory agency prescribes the best method.

Now that we’ve looked at the different basis types available, it’s time to determine what information you should be tracking. The key here is to capture all of your business transactions in the simplest, and most efficient, way possible. This includes both cash and noncash transactions.

Depending on your specific business or industry, you might need to consider tracking your transactions in greater detail. Here are some areas to consider tracking:

  • Should you be tracking direct and indirect costs related to construction or manufacturing contracts so you can see the profitability?
  • What sales tax jurisdictions do you need to track for sales tax reporting?
  • Do you need to track certain items for tax return purposes?
  • If you do business in multiple states, should you be tracking transactions by state for tax purposes?
  • Do you have different departments or divisions that you need to track in order to view profitability?

Once you decide what information you should be tracking, you can select an accounting solution, and start designing your accounting system.

Stay tuned for the second part of this blog, where we go in depth about how you track your information. Although we’ve shared similar posts about these topics in the past, we think a refresh and reminder is important. If you need help in the meantime, just ask!

Strategies for Success

As you begin your business, or even as you’re running it day-to-day, it’s important to consider strategy. Putting strategies in place can help you stay on track and achieve your goals.

When developing success strategies for your business, there are three common strategies you can focus on to help your business.

1. Profit Strategy. It might seem obvious to focus your attention on profit, but it comes down to how deliberate you are in making plans to reach this goal. Have you thought about how much profit you are aiming for each week, month or year? How about your sales plans to achieve these goals? P.S. For more on all things profit, check out this blog.

2. Resource Management. Resources here refer to human and capital. You know, the people and things the business depends on to make a profit. Some businesses are heavy on human resources, such as service oriented businesses, while others are heavy on natural and capital resources, such as manufacturing or technology companies. Furthermore, some businesses even require a good dose of both. No matter what type of business you’re running, your resources are extremely valuable. If you don’t take care of them, you risk the negative impact it can have on your business’s bottom line.

So what do resource management strategies look like? Human resource management can take on many shapes and forms. Maybe it’s developing an employee wellness program to keep your employees healthy, or offering special perks like free lunches or themed days in the office. There are a lot of options when it comes to keeping one of your most important resources, your people, happy. (If you’re struggling with this part of the strategy, let us know – our outsourced HR practices are pretty great!)

It’s also important to have a strategy in place to manage your capital. Capital, which can be anything from the tangible machinery and buildings a business owns to the financial assets of the company, is essentially the backbone of your business. For your physical capital, it’s good to have strategies in place which determine when to renovate or upgrade items as they get worn down. You should also have a game plan in place for your financial capital. Consider creating a strategy that helps you determine which assets can be used for which projects, and which assets should be left alone to grow and invest.

3. Market Alignment. Having a strategy in place to fit in the market and give people what they want is a major key to having a successful business. You want your product or service to line up with the needs and desires of your potential customers – otherwise, no one will buy.

So how do you put together this type of strategy? First and foremost, it’s important to understand who your target market is. Once you know who you’re trying to reach, you can further develop your strategy of how to reach them.

When developing this strategy, it’s also important to keep in mind the possibility and impact of change. People always want something newer, faster, better, etc. Try to develop a strategy that is flexible and allows for change when it is needed. This can help you stay up to date with the market and ensure your business is always ready for the next big thing.

The moral of the story

Setting strategies early on, and taking the time to think through them, can help you set your business on the right path to grow into the dreams you have for it. Strategies help develop the tactics and plans needed to perform your mission, achieve your vision and reach your goals.

 

Business Myths: Busted!

There are a lot of misconceptions, myths, bad advice and even lies about what it takes to be a successful business. Most of these issues come from people who have never gone into business, or those who have failed and are trying to find somewhere to put the blame.

To help clear the air, we’re here to debunk some common myths about running a business.

  1. To be successful, you have to be a pioneer – It’s often said you have to be the first one to develop and sell a product or service. However, this isn’t always the case. Think of Microsoft or Dell. Dell wasn’t the first computer and Microsoft wasn’t the first word processor. However, looking at the industry now, these two companies dominate! While the leading edge can be fun and exciting, joining an established industry with your own take on a product can also bring success.
  2. To be successful, you have to be cheaper –How you price your product does not always determine your success. Nordstrom and Ferrari don’t use a cheap pricing model, but they’re wildly successful. On the other end, Amazon and Southwest Airlines use cheaper pricing models and are also successful. The moral? Customers will pay what they think is fair for your product, but ultimately you have to decide how to model your product pricing. If you have a luxury item, customers will pay more for it. If you aren’t selling your product on the cheaper end, but are providing excellent service with it, your customers will give you business based on other factors besides price.
  3. The customer is always right – Let us guess, you’ve heard this one a few times before. If this was always true, it would be tricky to find any business being profitable. The truth is customers might be wrong sometimes, but they’re still important for your business. Take time to listen to what customers have to say, and use their valuable input when making business decisions. However, don’t let customer opinions overrule logical thinking or dismantle your business mission. When customers are wrong, they can sometimes cost you more money than they make you.
  4. Bigger teams mean bigger results – While having a bigger team can help get more accomplished, it can also hinder progress. Having too many people can lead to complicated lines of communication. It can also result in productive team members getting slowed down by helping new team members get up to speed. Team work can be great for your business, just make sure the teams are operating smoothly and efficiently.
  5. Failure means you’re doomed – We’ve been told our whole lives that being a failure is bad. In reality, failure is actually a stepping stone towards success. While failing can be a setback, it’s important to remember the lesson that can come from it. Failure is only a problem when you allow it to be the final stage, rather than taking lessons learned and growing from them. Sometimes our businesses must encounter failure in order to move forward.
  6. Knowledge is power – Unless you are actually applying this knowledge to your business or other endeavors, it’s just potential. Take what you know and consider using it to better your business, rather than keeping it to yourself. You never know what kind of growth and ideas you could spark from sharing your knowledge.
  7. Every customer is equal – Truth be told, some customers can actually be more valuable than others, but in their own ways. A customer who pays you more money isn’t necessarily of more value. Sometimes a customer who pays less for a smaller project might prove more value because they can help move your business in the direction you want it to go. A valuable customer will make you money, but will also align with your vision for your business.
  8. The more customers the better – Would you believe that some companies go out of business due to too many customers or unreachable demand for their product? If you have so many customers you cannot reach their demands, your business will struggle. Customers may start cancelling orders and taking their business elsewhere, which can result in word traveling that your business isn’t competent. Although it’s a tough decision to make, sometimes you have to turn away customers to keep up with demand and keep your capacity in check.

While some of these myths have some truth to them, many of them are just that – myths. By understanding what can really help or harm your business, you can put your business in a healthy position for growth and success.

 

 

 

 

The Importance of KPIs

You have a business and you want it to be successful. GREAT! But how do you measure it? Yes, it’s easy to say, oh I know what success is. But do you? Do your employees? Would you all define success for your organization the same way?

We’ll let you in on a secret … it’s not the same for every company. The definition of success is unique to you and by defining it, you can make sure everyone in your organization has a clear vision about what’s important and also how to achieve that standard of success.

But how you may ask? Enter KPIs (also known as Key Performance Indicators), which allow you to quantify what success means to your business.

To start, let’s answer your first burning question: What are KPIs?

KPIs

So why are they important? Well there are a few reasons …

They help you measure success. Once you’ve defined your overall business goals, the next step is to identify KPIs to make sure those goals are met. KPIs are measurable (see definition above) so you can track how you’re currently doing and what action you need to take (or not take).

What do we mean by measurable? Well you can’t just say we’re going to be the best at customer service. How do you measure what “the best” means? But you could say, we’ll have a 95% retention rate for new customers during their second year of service. This is something that can actually be measured and can determine key action steps to make sure you’re on track for success.

So everyone’s on the same page. One of the reasons why KPIs are agreed upon beforehand is so everyone has a clear definition of where the company is going. This only happens if you’re communicating your KPIs to your team and helping them understand how they are helping to drive the success (or failure) of the company. Define your KPIs for your team and provide them with a clear vision of what is important.

They hold people accountable. Your team now understands the KPIs for your organization. Great! But the next question is, why should they care? Make sure your team not only understands what your KPIs are, but how their daily activities and work affect them. So tie your KPIs back to performance. Make sure your employees know which KPIs fall within their department and use them to measure performance and provide direction. In this way, your team can clearly know what success looks like, both individually, and for the organization as a whole.

And one more thought (for good measure). Make sure someone is directly responsible for the success of each KPI. For instance, if one of your KPIs is an increase in revenue dollars, it would make sense to give the responsibility of this KPI to your lead sales person.

They give you the path to move forward. KPIs reflect the factors that are critical to your company’s success. But they can’t be accomplished in a day. So ask yourself, what daily activities do we need to do to contribute to the success of our business? If you have defined KPIs, this success should be easy to track. It can also show you areas where adjustment is necessary.

KPIs are not set in stone. So if you need to change them up, you certainly can. This is another reason why tying KPIs back to daily activities is so critical. When you’re looking at them regularly, you can see where strategy changes are necessary and where measurements need to be adjusted.