By Larry Schulze
If you want to improve your business part of your effort should be spent on ensuring you know your financials.
And knowing your financials is more than knowing how much profit you make. Knowing your financials means knowing how you made, or how you did not make, those profits. Not knowing this one area is a major issue impeding many VARs from driving more profits to the bottom line. If you do not understand “why” from a financial aspect of your business, you are merely shooting into the dark when it comes to fixing problems within your business.
Here’s a look at the top five issues I’ve found when evaluating companies’ financials:
- The Chart of Accounts does not consist of enough detail. This is the most glaring issue. Your Chart of Accounts does not reflect your business. The P&L (or Income Statement) is really a report of how the revenues, expenses and profits in your business are generated. If it consists merely of Product Revenues, Service Revenues, Wages and Expenses, then it isn’t detailed enough. You should be able to look at your P&L and determine how each part of your business is performing. That means that you need to know the gross profits for each part of the business. Product revenues should be broken out into the different revenue streams you have. Expenses should be broken out and matched with the appropriate revenues. Service revenues and expenses should be treated similarly. Compensation should be segregated by Sales, Service and Administrative. And so on.
- Most VARs do not know how to gauge their financial success. This is called benchmarking. Having a detailed Chart of Accounts is great, but if you do not have benchmarks to grade the results, then your numbers are just numbers. Know what your Service Salaries should be as a percentage of Service Revenue; what your Service Gross Profit percentage should be; what your Sales Commissions as a percentage of your overall revenue and gross profit need to be and so on. Know your benchmarks.
- The most out of control numbers for most VARs are Administrative Expenses. We tend to simply accept that they are what they are. These expenses are called Non-strategic Expenses. In other words, they have nothing to do with generating revenues or profits. Minimize or eliminate these expenses as much as possible. They are merely a means of spending money, not investing.
- The Balance Sheet is the most ignored document in our industry. While the P&L reports how well your business is performing, the Balance Sheet gives you a health check on your business. The Balance Sheet reports your ability to meet your debt commitments and the ability to fund your business. Items such as your Debt Ratio, the Quick Ratio, Return on Assets Ratio and your Sales Days Outstanding Ratio are all numbers you should know and understand.
- And last, the budget. We use a saying, “If you do not know where you are going, any road will get you there!” Create that budget. Without it, how can you plan your capital expenditures or know the resources you will require five months from now? Plan for your financial success; don’t hope it will just happen.
Master these five areas and your business will be in a better position to thrive and grow.
Larry Schulze is one of the resident experts of The ASCII Group, which provides to the ASCII MSP/VAR Community financial strategies and higher profits. Schulze also runs The Taylor Business Group, an IT Solution Provider-centric consulting firm. Founded in 2001, TBG has brought efficiencies and higher profits to IT Solution Providers through a focused effort in delivering best practices to the ITSP’s service, sales and administrative functions via management consulting; financial and accounting consulting; management and sales workshops and more.