As accountants, we can never get enough of record keeping. We know our clients are nowhere near as interested, but time and time again we see how solid record keeping adds value and profit. In a recent blog we showed you how keeping track of customer profitability helps increase your own profitability. Today we’d like to offer more ideas on how effective record keeping can add value to your operations.
Let’s say you’re starting your own business and you feel you’re on the right track. You have a good business model and a strong plan for moving forward. Maybe you’ve implemented it effectively and have started to reap the rewards. But how do you know if you really are on the right track?
Most businesses use their annual financial statements as their scorecard to determine effectiveness. By doing that, you’ll learn how successful you’ve been in monetary terms, but there’s no insight about how well you could be doing. Following your annual budget is much the same. It’s useful in assessing operations against what you’ve planned for, but doesn’t help in evaluating relative performance.
So you probably want a solution, huh? A great tool we use to establish relative performance easily and economically is benchmarking. It involves pitting your operating results against others in your industry. We know no two businesses are identical, but these comparisons give useful insight. You can see where your performance ranks lower than your competitors in certain operational areas.
By figuring out where your performance is poor, you can drill down to see if you can get better. You can focus on particular operational areas, analyze them and develop strategies for improvement. But how do you get useful operational information about your competitors?
It’s a no brainer if any of them are publicly traded. There’s a wealth of public filings for you to review and analyze.
For non-publicly traded companies, seek out your trade organizations and publications. Trade associations often survey their members, and results are available to members. Trade journals publish information pieces about specific companies in the industry. There are useful insights to be found if you’re up for a dig.
And of course (perhaps it’s another no brainer) – the Internet’s a great source. Companies will direct you to articles written about them and their published white papers offer invaluable insight into operations.
One strategy we find particularly helpful for our clients is accessing databases that keep track of operational information by industry category code (SICC). There are several databases like that.
They only give information about industry averages, but don’t let that stop you. It can be helpful in figuring out the areas where your performance is subpar, and giving you direction about the areas that need more attention.
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Some places to look at include sales levels, gross profit percent, specific operating costs as a percentage of sales, accounts receivable turnover, days of inventory, accounts payable level, and debt-to-equity.
In evaluating the effectiveness of your business performance, well-designed record-keeping and information systems are crucial. They get the right information to the manager on time, and allow for regular monitoring and adjustments that help increase your bottom line.