C. Lynn Northrup, CPA, CPIM

Managing Your Business

We have been offering weekly business tips and week 14 focused on management activities and they included the following:

• Create a vision for your business
• Select and define your market
• Select and define your service offerings
• Design an organizational structure
• Define the critical success factors
• Define the key performance indicators
• Prepare activity targets and cash flows
• Organize financial resources
• Prepare profit plans

Yes, all the above are management activities, but how many businesses do a good job of performing any of these activities or even perform all of them? When you assess the list of activities, you think, wow that’s a lot of work. Where do I start and how do I get my arms around all this effort?

The problem for many businesses is that they really don’t do a good job of focusing on any of these activities. As a result they wonder why they get into trouble and end up putting out fires. These management activities are called “working on” your business in contrast to “working in” your business. It starts with having a clear vision for your business and knowing where you want to go. This is the first step in the process and leads to development of the other activities. Without having a clear vision, it is impossible to do a good job of performing the other activities.

I think working on your vision for your business should be a never ending process. The more you focus on clarifying and developing your vision it will enhance the time and effort spent on the other activities. You’ll begin to develop a better idea about your market, your service (or product) offerings, and enhance the design of an effective organizational structure.

Understanding of the critical success factors for your business will have greater clarity and focus. This leads to more effective selection of performance indicators and creates a performance measurement system that will help guide you toward your true vision. Linked to performance measurement are activity targets, goals, and objectives.

Once good financial systems are in place, it makes it easier to effectively organize financial resources and develop accurate cash flow projections. Cash is the life blood of any business. While many businesses worry about cash flows, most of them fail to do a good job of managing it and developing accurate cash flow projections.

Finally, we get to the preparation of profit plans. Most businesses fail to create a solid foundation for developing reliable profit plans. For the most part I think businesses are winging it by putting projections together with a hope and a prayer rather than utilizing a planning system grounded on reliable data and assumptions.

So, fine tune your vision and one good action will lead to another. More importantly, set aside the time and the resources to perform these management activities. Learn to “work on” your business as opposed to “working in” your business. If you can achieve this level of focus, I think the results will speak for themselves.

Why Change is Tough

Change creates uncertainty. When you don’t know what’s going to happen it creates an uncomfortable feeling. Overcoming this reaction and sense of discomfort isn’t easy, but is part of coping with the change process. Most people will prefer to remain stuck in misery than move head long toward some unknown destination. Change creates a feeling of over what you are doing or where you are going. Decisions that are imposed on you or sudden surprises allow very little time to prepare or adjust for the consequences of what is or will be occurring.

Any decision that is imposed on you with no time to adjust or prepare will meet with resistance. It is easier to resist and say no rather than say yes to a change or new initiative. The instant reaction is what are we doing rather than why are we doing something. Digging deeper to get closer to why a change is being made why something is occurring makes for an easier transition process.

People are creatures of habit. They don’t react well to having their cheese moved. Things are going to be different, but how much different? New differences jolt us into an uncomfortable awareness that things aren’t the same and never will be again. The ability to overcome surprises and change requires a focus on what’s important and avoiding making changes for the sake of change.

Change creates something different. Anytime things are different there will be resistance because people feel a loss of face. The people responsible for what happened before the change have a perception that they were doing things wrong. This makes starting new initiatives very difficult. In these situations it is critical to provide dignity for people by celebrating elements of what worked in the past. It is also essential to facilitate a transition to the future by helping them understand that the world has changed.

Another reason people resist change is a concern about their ability to successfully make the proposed change. People will stick to what they are good at, even when they know that it is no longer relevant. Deep down they are worried that their skills will become obsolete. It is essential to invest in providing them with reassurance, ample information, education, training, mentors, and support systems to get them past resisting progress.

Change requires extra effort and more work. Recognition is the key to successfully addressing this issue. This frequently can be overcome by allowing people with time to focus exclusively on the change effort. Further, providing additional recognition with rewards and extra perks for the additional effort required will help make the transition easier.

Making changes often brings true pain. New technologies displace old ones, jobs are lost, and investments wiped out. In these situations, honesty and transparency is usually the best course of path to follow. While you can’t always make people feel comfortable with change, it might be possible to minimize the discomfort. Digging to the bottom of the sources of resistance should always be the first step toward finding good solutions. In the final analysis, what really matters is the change in people behavior and how systems are either enhanced or detract from the changed behavior.

Getting Unstuck

Everyone and every business experiences times when things aren’t going well. You feel like you’re treading water. It is comparable to a sports team or an athlete that hits a slump. It’s a frustrating feeling. You feel like you need to be doing something but it seems like you’re going backwards or standing still. This is a normal situation that happens to everyone at one point or another. The big question is how to get things moving again in the right direction.

Here is what works for me. I am big on lists and notes. When I hit the wall, I sit down with a blank piece of paper and start making a list of all my thoughts and ideas. I try not to be in my office when making these lists to create neutral territory. I outline my thoughts and concepts without regard to whether they are good, bad, crazy or whatever. My next step is to brainstorm the list and expand on it where appropriate. This includes considering the pros and cons of each idea.

Another step is to research each idea that I feel might have some merit. This often leads to checking on what others are doing, especially competitors. During this process, I reflect on what’s working, what’s not, and why. Just engaging in this sort of activity often will jar loose new thoughts and ideas. Often an old idea turns out to be a good approach after a little tweaking.

I am careful not to allow any knee jerk or panic reactions. It is important not to overreact. Take some time and let things settle in and contemplate various possibilities. Also, this might also be a good time to take a break. You would be surprised how this can rejuvenate your thinking. All of a sudden fresh new thoughts and ideas pop into your head.

Often just checking your data and numbers can get you pointed in the right direction. Actually, all small businesses should be checking their numbers and trends each month. This process doesn’t need to take a lot of time. This could maybe take an hour each month. Having a virtual coach or CFO can be a great catalyst in performing this step and a source for some fresh ideas. This approach gives you feedback and an objective point of view.

I’m big on lists and to dos. It helps keep me from procrastinating and putting off things that need to be done now. Procrastinating will get you stuck every time. That’s where my lists and to dos provide the motivation needed to keep things moving. Writing things down helps to reinforce your ideas and concepts and keep your thought process active.

These are things that work for me to keep myself on track and from getting stuck. Hopefully they will be helpful to you as well. Give them a try and you might be surprised on what new thoughts and ideas come to light.

Biggest Business Problems

I provide my small business clients with a road map to success by helping them solve problems. Having said that, here is what I think are the three biggest problems:

1. Business Planning
2. Financial Management
3. Managing Business Processes

Based on my experience these are the areas where all businesses have issues. However, smaller businesses struggle more with them because they lack the necessary resources and expertise.

All businesses plan at some level but do a poor job of it. They fail to do it in the depth that’s required and don’t address the strategic elements needed for success. Planning takes patience and time to carefully pull together all the necessary components. Leaving out strategic and competitive analysis combined with strategic thinking is a recipe for failure.

All businesses, especially small business, should get help to coach them through the planning process. They could gain the benefit of skilled expertise and objective insight that will increase their sales and profits. Well conceived strategies make the difference between failure and success.

Financial management is another problem area. Accounting and finance is like a foreign language to most small business owners and yet it is one of the most critical components of building a successful business. Cash management and good performance measurement are often neglected or done poorly. Business owners should consider having a financial pro assist them in monitoring this data on a monthly basis.

Monthly diagnostic analysis is affordable using cloud-based tools and is money well spent. My approach is to track trends against goals for all the key financial indicators. This is a simple straightforward approach that most small business people can grasp. This process will take less than an hour each month and is a critical step to help keep the business on track toward achieving its goals.

Every business has processes that can be improved. Process improvement gets neglected because of the tendency to get caught up in day to day details. Objective assessments can quickly identify processes and areas for improvement. A skilled business coach can zoom in on problem areas overlooked by business owners who are too close to the action. Just having the support of an advisor can significantly improve profitability.

Narrowing small business problems down to the top three was a good challenge for me. It got me thinking about the multiplicity of problems facing small business. I think that addressing these top three will develop solutions for 80 percent of all small business problems.

This focusing process emphasized my conclusion that small business owners should seek help in dealing with these three problem areas. They need to overcome the resistance to spending money on a coach or a financial pro since it represents an investment in their successful business future.

Measuring Performance

If you can’t measure it, you can’t control it. If you can’t control it, you can’t manage it and improve it. Businesses are flooded with an overload of information and data. So what should we measure?

My approach to performance measurement is to keep it simple and focus on the indicators that matter the most. Measurements should be action oriented to help businesses make better decisions and at the right time. This requires an accounting and financial information system capable of providing the right information on a timely basis.

Measurement starts with a strategy, goals, and plans. Knowing where you are going and what’s needed to get there is critical. This is where most small businesses fail to do a good job. They need help with planning and making sense out of measurement. A good coach combined with CFO support can be a difference maker.

Metrics that matter should include:

• Revenue
• Cost of Goods Sold
• Gross Margin
• Expenses
• Profit
• Cash
• Quick Ratio
• Debt to Asset Ratio
• Days of Sales in Accounts Receivable
• Payroll/Number of Employees

Tracking trends on these top 10 metrics and comparing performance against forecast and goals is the key to small businesses survival and success.

All the above measurements matter, but cash is king. Cash starts with converting more sales leads into sales because it is critical to increasing cash flow. Once you make the sale, it’s time to get paid, and the faster the better. Since many businesses sell on terms of 30 days, closely monitoring accounts receivable and the number of days sales outstanding is one of the key components of cash conversion efficiency. The faster or fewer number of days sales outstanding, the better.

You need to purchase materials or goods that are recorded into inventory before converting them into sales. The more effectively you turn your inventory into sales by reducing cycle time is crucial. Your cash conversion is determined by combining the average number of days cash is tied up in accounts receivable plus the average days cash is held in inventory less the average number of days of payables. The fewer number of days contained in the cycle the better.

The faster your cycle time, the faster you will convert your sales into cash. A component in achieving faster cycle times is to reduce the number of days required to send out your sales invoices after goods have been shipped or services rendered.

Monitoring profit margins is another element of keeping your business healthy. Tracking the trend of sales, expenses, and cash using diagnostic dashboards is something every business should be doing on a monthly basis.

Virtual CFOs can be a big help to small businesses in measuring and monitoring performance because they know how to use cloud-based dashboard tools and charts to point out the areas where improvement is needed. They also understand the relationship between key measurements and how they impact performance. Having monthly performance measurement reviews should be a ritual for every business as they can represent the difference between success and failure.

Starting a New Business

One of my students asked me to share advice and information on starting a business. After thinking about his request, I recalled a recent article posted on the Business Owners Zone. It is a must read for any person considering a new business venture and was posted by John Benson who successfully started a business and lived through the process.

I thought the most critical question in the article was “do you have a business plan?” A business plan will help to answer the question of whether you have enough money to start and grow the business. The article also touched on the psychological and emotions issues that should be addressed before launching a new venture.

Business coaches weren’t mentioned in Benson’s article but I think having one is a good idea. In a previous blog post I pointed out that business and life can be a lonely journey. Having an experienced coach can be the difference maker between success and failure.

Starting a new business requires serious research and analysis. Here are some questions to consider:

• Am I qualified to do this work?
• What is the cost to start this business?
• What resources do I have to commit to the business?
• What is the competition?
• How successful is the competition?
• Will I need help to run the business and can I get the help I need?
• Can I run the business from my home?
• Who can I talk to about starting this business?
• Do I need a business coach or advisor?

These are just a few areas you need to evaluate. Many other questions will emerge as you prepare to start your journey.

One of my other blog posts dealt with the flower exercise to help you understand your skill set to get a better handle on how well equipped you are to start and run a business. The self-examination process should be part of your homework before making a leap of faith into something that’s not a good fit.

If you make the decision to move forward and follow your dream you will need an expert financial advisor. I strongly recommend engaging a CFO advisor to help you set up a cloud based accounting system. This will provide the necessary financial tools to help manage your new business. Having a good accounting system and being linked to your own virtual CFO is an essential ingredient to success.

Your business coach together with a virtual CFO will help you craft a strategy and develop a business plan. These steps combined with a solid accounting system will give you the tools to measure and monitor your business results. Measurement is critical. If you can’t measure it, you can’t control it. If you can’t control it, you can’t manage it and improve it.

Delivering More Customer Value

Here are three ways businesses can deliver increased value to their customers:

1. Charge lower prices
2. Help customers reduce their other costs
3. Provide more benefits

I think businesses need to focus on finding ways to provide customer value other than just reducing prices. When you provide a benefit bundle to add customer value you are providing a uniqueness setting your business apart and beyond the competition.

Here are some ways to offer more benefits to customers that can take your business to new levels:

• Offer customized products and services
• Offer more customer convenience
• Provide faster service
• Give customers more or better service
• Give customers extra training or coaching
• Provide an extraordinary guarantee that competitors can’t match
• Give useful tools (hardware or software) to customers
• Win, keep, and grow customers by rewarding them (membership programs)

Now you have some ideas on how you can beat the competition besides just lowing price.

Helping customers reduce their other costs is an additional way to increase customer value. Some approaches include arguments that your product is more reliable, lasts longer, or attracts higher prices in the second hand market. Some businesses will provide support to customers in the way of coaching and training on how to reduce costs when using their products.

Other approaches to helping customers reduce their costs might include techniques to improve business processes such as purchasing and ordering costs. In this regard, providing them with unique systems to accomplish these tasks is one approach that can be utilized.

Inventory always represents a challenge for both small and large businesses. Offering customers just-in-time supply capability is one way to deal with this issue. Another approach is utilization of consignment arrangements. Some companies offer outsourced inventory management that help to maintain lower levels of inventory investment.

Some businesses justify higher prices by helping their customers reduce their processing costs. Techniques might include more efficient ways to use their products which lowers processing costs. Application of lean six sigma methodologies can help improve yields, reduce waste, eliminate chances for accidents, and lower labor costs.

Strategy – The Competitive Edge

Having a strategy is essential to success. It gives you the competitive edge in business, politics, and everyday life. Strategy represents the steps and actions that need to be implemented to fulfill your vision and achieve your mission. Success in strategic planning doesn’t come easily and in many instances fails to contribute to strategic thinking.

How do we develop a strategy that will create a competitive edge? First, utilize an approach called the strategic thinking process outlined in a previous blog post. Thinking strategically and focusing on simple processes to apply concepts like Blue Ocean Strategy will improve you chances for success. Crafting a successful strategy requires an understanding of Blue Ocean Strategy.

Blue Ocean Strategy is focused on providing value propositions to customers in ways that have a positive impact on the company’s cost structure. Finding directions or features your competition hasn’t offered is the key to success. Implementing these new concepts combined with eliminating factors others take for granted is a big piece of the puzzle. This creates cost savings from generating higher sales volume as a result of the superior customer value created from new concepts never before offered.

Blue Ocean Strategy essentially reconstructs market boundaries. This is achieved by going beyond looking at just the numbers and focusing on a bigger picture. Getting past what is being done and developing a new source of customer value is critical to successful strategies. This requires development of the proper sequence or steps to allow a strategy to be successful.

Strategic sequence includes having exceptional customer buy in to the new business idea. Your selling prices need to be easily accessible to the target market of buyers. Once you know what customers want and are willing to pay for, you need to be capable of attaining costs which will allow achievement of targeted profit margins. Finally, you need to be organizationally capable of putting the new strategy in place and making it work. All of these steps may sound simple, but in reality will likely involve considerable effort.

Blue Ocean Strategy success depends on the success of the following three propositions:

1. Value for customers.
2. Profit from revenues less the cost to produce and deliver value.
3. People that are motivated by the incentives created by the strategy and effort needed to support and implement it.

When these three propositions achieve a combination of differentiation and low cost a Blue Ocean scenario is created that builds sustainability and formidable barriers to imitation.

Red Oceans result from failure of the three strategy propositions to create differentiation or low cost. Competing in Red Oceans opens the door for extensive competition and lower profits or losses. Many different factors can allow other companies to imitate your strategy and undermine success. Creating barriers to imitation through proper strategic alignment, effective organizational structure, branding, and effective economic and legal steps is essential to preventing Red Ocean environments.

Blue Ocean Strategies can create a competitive edge, but it takes work. Hopefully, you have a clearer understanding of what is involved in crafting a successful strategy. Thinking strategically to identify and create Blue Oceans is going to take you out of your comfort zone. But isn’t it better to achieve new success in contrast to failure resulting from swimming in Red Oceans?

The Experienced CFO

Good CFOs are hard to find. Being a CFO is more than presenting some dashboards and talking about a few financial ratios. They need specialized skills and experience to assist business owners in a variety of different ways. I understand these challenges based on over 30 years of experience as a controller and CFO.

Probably the most critical area is guiding development of strategic plans and structuring action plans to support the strategy. Another challenge is managing cash and ensuring that the business is properly financed. This means establishing an effective capital structure together with financing plans that fit objectives and business growth.

Driving business performance and the ability to use the tools required to support growth are also essential. These skills include understanding sales, marketing and the underlying cost structure to support growth. Business analysis, performance measurement and cost accounting are just a few additional skills that are essential.

Prioritizing capital investments and helping guide business owners to make the right decisions on the right projects is another area where CFOs can help business owners. Risk management is a key factor in allocating capital and applying enterprise risk management steps is essential to success.

Other high priority areas include buying and selling companies and succession planning. I can help you in these areas based on my experience with a top consulting firm who specializes in these areas. I can help you gain a competitive advantage in today’s complicated business world.

Good CFOs are hard to find. Most talented CFOs are already employed by larger companies. Small business owners should look for talented advisors capable of using cloud technology and tools allowing easier access to this hard to find skill set. It also reduces the cost of services provided. I am certified in the use of cloud accounting systems and am available to help in these areas and wrote the book on profit focused accounting.

Not all CPAs using cloud accounting and cloud technology have the training and experience to offer CFO support. These CPAs should consider collaborating with an experienced CFO advisor to work with their clients to create win/win situations.

Utilizing a skilled CFO will give businesses a competitive advantage. Business owners can’t know everything and it makes sense to access skilled experience advisors to fill in the gaps. If you are looking for a virtual CPA with extensive CFO experience or need help in this area please contact me.

Cloud Accounting – It’s Safe and Secure

Cloud accounting is as safe as internet banking which we have been doing for over fifteen years. When utilizing cloud accounting it is important to realize that you have control over who has access to your system and what they are authorized to do. It is essential to know that no one including the support staff of the software company can access your data unless you authorize it.

Standard access to your system is done through a login and a password. Some vendors such as Xero and QuickBooks Online offer the option of a two-step authentication which provides a second level of security. This reduces the risk of your account being accessed if your password is compromised. Small businesses typically don’t do a good job with security so this step helps them do a better job to ensure the security of their system.

All data entered into your cloud accounting system is encrypted using industry-standard TLS (Transport Layer Security). The data is also encrypted when it is stored on the host servers and when it is transferred between data centers.

Online accounting software vendors do an excellent job of protecting their systems and networks. They utilize multiple layers of security to protect your data including firewalls, intrusion protection systems and network segregation. In addition, they utilize industry leading security vendors to help them protect their systems against intrusion from global intelligence threats.

Software vendors are located within enterprise-grading hosting facilities that employ robust physical security controls to prevent physical access to the servers. Controls include 24/7/365 monitoring and surveillance combined with on-site security staff and regularly scheduled ongoing security audits. In addition, multiple geographic and separated data replicas and hosting environments are maintained to minimize the risk of data loss or outages.

Xero, for example, performs real-time data replication between geographically diverse and protected facilities. This is done to ensure that data is available and stored safely. So even if an entire hosting facility failed, they can quickly switch to a backup to keep Xero and your business running.

The true risk with cloud accounting systems is the people using the systems and their failure to utilize proper care when working on the internet. Scammers will try to trick people to obtain user names, passwords, credit card details, and bank account numbers. Some of the tricks that they try to get you to:

• Clicking on a link that might infect your computer with malicious software.
• Following a link to a fake, but convincing website that will steal your login details.
• Opening an attachment that will infect your computer.

The key is to be aware of these traps to steal your sensitive information and be careful not to fall for these gimmicks.

Some things to watch for that will help you avoid problems include watching out for the following indications:

• Incorrect spelling or grammar.
• The actual linked URL is different from what is displayed (hover your mouse over any links in the email to see if there are any differences.
• Emails that call for urgent action.
• Emails indicating that you have a parcel waiting that you didn’t order or promises for rewarding you for helping out.
• Changes to how information is usually presented.
• If you receive a suspicious email do not click on any link or attachment contained in the email.
• Do not reply to any suspicious emails and delete them.

You need to understand that while there are potential hazards out there on the internet, cloud accounting systems are as secure as on line banking. The biggest security risks lie with the carelessness of people using the system.

Cloud based accounting systems offer significant advantages to help you grow your business. They represent accounting systems of the future that you can use today because their unique capability and enhancements such as dashboard and performance measurement tools. They also facilitate utilization of virtual financial experts to assist you in managing your business.

Cloud accounting systems allows businesses to take advantage of cost effective virtual advisors and cloud technology tools to accelerate growth and increase profitability. There’s lot’s to gain from cloud based accounting and with minimal risk.