Business Failure Research Provides a Guide for Better Accounting

New small businesses have about a 50% probability of lasting more than 4 years.  This is a fairly well-known, and probably the most reliable, statistic about this conclusion.  This statistic can be found by searching the Internet.   For example, reference to the statistic can be found at two sites (click here and here), which are associated with the US Bureau of Labor Statistics, a Department of Commerce agency.  This statistic is based on US Census Bureau survey data obtained from US businesses. 

What are the reasons for business failures?  This is a question that many business researchers and analysts ponder and pursue the answer to.   I researched the Internet to find an answer and found many lists of possible (suggested) causes for business failure for small businesses.   Nothing found suggests that any one cause can be shown to account for most business failures. 

But rather, my Internet research found more than 40 causes suggested by various business researches and analysts.  Many of the 40 possible causes are identified at these three websites:  the first, a US Small Business Administration site (click here); the second, (click here) (a PDF file) shows a study conducted for the Washington State Governor; and the third, the best-guess opinion of a long-term, and presumably knowledgeable, business researcher and analyst (click here).  Other similar websites add additional causes not identified at these sites.   Many of the lists at these websites identify the same causes, with some of the sites giving a ranking of the most likely to less likely. However, I did not find statistical studies that show the predominance of some causes over other causes.

In analyzing these lists, I realized that several of the suggested business failure causes might be prevented by good accounting and the competent analysis of the accounting data.  This suggested to me that these accounting–related causes could serve to alert the small business owner and accountant to critical problems that good accounting can address and, in doing so, guide the business decision-makers on ways to reduce the risk of business failing.

The 12 causes on the lists I analyzed that might be averted by using good accounting, its analysis, and the correct responses to that analysis are:

Controlling costs
Fraud
Inadequate capital
Low sales
Over investment in fixed assets
Personal use of business funds
Poor cash flow management
Poor credit arrangement management
Poor inventory management
Pricing not sufficient to cover overhead and to earn sufficient profits
Too much debt
Unexpected growth

The consequences in each of these 12 potential problems could be averted by using good, sound accounting practices, competent analysis of the accounting results, and then the right responses to the analysis.

Although there is no one cause for business failure, a significant number of causes that business analysts have identified that lead to business failure are accounting-related.  By accounting-related, I mean the cause lends itself to correction with good accounting.   Be aware of this list of 12 as you run your business and use accounting resources.

Mapping Sales and Other Data

With commercial products such as Microsoft’s MapPoint (click here) and MapBusinessOnline.com (click here), mapping a company’s sales and other data, I suspect, is relatively easy.  With these products, and probably others, a small company, it seems to me, can, for a small cost, gain a lot of leverage from data that the company has in its accounting system.

A company’s accounting system often stores a lot of data that might be usefully mapped.  With the mapping, new insights can possibly be gained.  If the data, such as sales, and vendor and customer names, have address information (e.g. street, city, state, and/or zip codes) and the data can be exported to Excel, the data should be able to be mapped using a commercial product.

Besides showing the geographical concentrations of sales, customers, and vendors, other ways in which data out of the accounting system might be mapped include:

1.  Showing a sales representative’s territory and sales quantities;

2.  Showing optimal routes to drive from customer to customer locations (or potential customers, vendors, etc.);

3.  Showing where employees live, which might be useful in scheduling and perhaps other planning;

4.  Showing percentages of products sold in geographical areas;

5.  Showing quantities and names of inventory at various warehouse locations; and

6.  Comparing sales trends for more than one time period in geographical areas.

Maps showing the above information could well give new insights, and useful decisions, resulting from data (valuable data) already captured by the company.

Tracking Costs (and Revenues) Directly Related to a Product or Service in QuickBooks

Knowing as accurately as possible those costs (resources) that are required to produce a product or a service can be very useful in making decisions on producing the product and service.  Are you charging enough for the product or service?  Can the cost be reduced?  Knowing accurately the costs and revenues related to the product or service will make the answers to these questions more correct.

Accounting systems, such as QuickBooks, usually offer various ways of tracking costs.  For example, QuickBooks has a good method of associating costs with jobs (customers) and tracks well cost of inventory sold.  However, although knowing costs associated with jobs is useful in making decisions related to the jobs (and customer), such costs are not equal to product and service costs.  Also, the cost of inventory sold is not the full cost associated with a product. 

Two sets of costs, job and product/service, are useful and should be used in making decisions, one about customers and the other about products and services.  The nature and need for decisions made about customers and about products/services are different.

In QuickBooks, using the class feature allows for efficient and effective tracking of most, if not all, costs, including general operating costs such as marketing and training, required to produce a product or deliver a service.  Using the class feature leaves the job cost feature free for job costing.  A class list can be set up containing each product and service category that generates revenues.  With such a class list, the appropriate revenue category can be quickly selected at the line item level on both the sales form and the payment form.    The key to this process is being able to track revenues and costs by line item on the sales and purchase forms.  This means that single invoices, sales receipts, bills, and checks allow for the recording of multiple revenues and costs by class selection.  This greatly accounts for the efficiently and effectiveness of this tracking process.

Then, the profit and loss by class report will show what should be truer profits made on each product and/or service category, leading to better pricing and cost control changes.

Access Company Credit Risk Using Internet Resources

Granting a company the right to pay for a service or product at some time after you have delivered the service or product involves a risk that the company will not pay what is due.  Resources on the Internet might help you in assessing the credit worthiness of that company and help you decide on whether selling to that company is a good idea. 

This blog identifies some of these resources.  Some of the resources do not require a fee but others do.  All involve in some way a database with historic information related to the company.  Such historic information is useful for assessing the credit worthiness of the potential customer.  

The expense of using these resources, in terms of your time plus any fees, probably can be kept to less than two to three hundred dollars per customer, perhaps much less. This seems like a small price to pay to weed out potential non-paying companies when the cost of the service or product to you is high enough.

What follows is a suggested sequence of using the Internet to obtain information on a company and its credit worthiness.

Maryland, and probably most other states, offers access to Maryland-registered company information from its websites.   At this Maryland site (click here), information can easily be found on such things as when the company was formed, the value of personal property (based on personal property tax returns), and whether the company is in good standing for paying it personal property tax.  Also from this site, a search of UCC filings will show those filed against assets owned by the company.  These filings might be useful in evaluating the debt status of a company and perhaps how others view the credit risk of the company.

Also in Maryland, and probably other states, you can search  for the real (land and structures) property a company owns and the value of that property as assessed for real property tax purposes (click here to go to the site where a search can be made).

The American Bankruptcy Institute has a site (click here) apparently still being developed (i.e., in beta status) that will search several databases simultaneously for bankruptcy and other legal news related to the company of interest.  Knowing that a company has gone through bankruptcy, and/or other legal proceedings, can be useful in evaluating the credit worthiness of the company.

The United States Government maintains the PACER (Public Access to Court Electronic Records) system (click here to go to this system’s website).  At the site, you can search US court cases that a company has been involved in.  Fees do apply.  Court cases can provide insights into a company’s financial and other transactions.

Experian (click here), Equifax (click here), and TransUnion (click here) offer reports on small businesses that assess the credit worthiness of the businesses.  Fees for basic reports range from $35 to $100, and more.

D&B (Dun & Bradstreet) offers reports starting at $62  that provide information on a company’s payment history.  Click here for details.

LexisNexis, which maintains or has access to large numbers of databases, offers a small business credit risk service based on LexisNexis use of those data bases (click here to go to the service).  LexisNexis also offers a service that will search not only state records of UCC filings but also state records showing state tax liens against companies, another indicator of a company’s ability or willingness to pay on time (click here to go to the service) .

Spending some time, and in some cases fees, using such Internet resources as identified above could fine risks associated with the credit worthiness of a company, and help you decide on whether you want the company to be a customer.

Using Force Field Analysis for Change

Recently I was in Mali working with a women’s rice growing cooperative to help them improve their accounting.  During this period, I had a chance to assess and become familiar with their situation and their desire to be more profitable.  Their lack of profitability is a concern for them.  They want more profits, more wealth generation.

A conclusion that I came to is that the cooperative needs to be run more like a business, needs to incorporate sound business management practices, in order to become profitable.  Because it seems to me a change is needed, I decided to learn more about force field analysis by writing this blog and apply the concept of force filed analysis to the suggested change for the cooperative.

At the risk of over-simplifying, force field analysis evaluates the forces that promote a change and the forces that oppose the change.  The analysis tries to identify all those relevant forces that promote and those that oppose the change

Here is a list of factors that I came up with that promote the cooperative in Mali to being more like a business:

1.  Lack of profit as a cooperative – 3;

2.  Recognition that as a business, profits are more likely – 4;

3.  A better work environment, and other benefits, for cooperative members when the cooperative is run more like a business. – 3.

For these three factors that promote the change, I have assigned a weight to the importance of the factor in promoting (leading to) a change.   The weight is on a 1 to 5 scale, with 5 being of the highest importance.   The total weight of factors supporting a change is 10 (3 + 4 + 3).

Here is a list of factors that oppose the cooperative being more like a business:

1.  Lack of business skills and practice know-how – 4;

2.  Traditional practices and habits of behaving as individuals in decision making and action in rice growing versus company decision making and behavior – 5;

3.  Lack of concepts on assigned roles and company organizational structure – 3.

The total weight of factors opposing a change is 12 (4 + 5 + 3).

Now for some analysis on the above lists and what they might mean and what they suggest.

First, the above lists are based strictly on my experiences while in Mali teaching the cooperative accounting and evaluating their situation.  The correctness of the above lists is therefore constrained by whatever skills and experiences I have in the evaluation.

I believe the first obvious conclusion to reach from the above lists is the cooperative is not going to change to being more business-like on the basis of the current forces for and against that are in place.  The against forces are stronger then the for forces.  So, actions and interventions need to occur if a change is to take place.  The above lists can help guide on what these actions and interventions might be.   An approach is to create a greater weight for each of the for factors and a lesser weight for each of the against factors.

The factor with the greatest weight (5) and therefore draws the most attention is the against factor - traditional practices and habits of behaving as individuals in decision-making and action in rice growing versus company decision making and behavior.   How do we reduce this weight?  Like many of the other factors, both for and against, training is an important action to take.  But, now we recognize one type of training should relate to the advantages of group decision-making; collaboration; team building; advantages of group versus individual performance, and similar concepts.  Such concepts relate to changing traditional practices and habits of behaving as individuals.

Training is also important to reduce the other against forces.  Through creating the lists, we now know better what the training should focus on.  

For the factors that promote change to being more like a business, training on what profits are, how to measure them, for example, by using correct accounting and creating income statements, should be emphasized.  An accounting system should be implemented with the goal of showing annual profits.  Using an accounting system should help the cooperative to be more business-like.

Company organizational structure can bring benefit to the participants in a company versus when the members go alone, which a problem with the current cooperative situation.   Such benefits include: specialization of duties, which promote greater success for the organization versus when individuals act alone and better collaboration and coordination on the use of the available resources, easing the burden that can exist when individuals go alone.    Specialized training should be planned and presented demonstrating these concepts and the results of these benefits to members.

Force field analysis strikes me as a relatively simple but powerful tool to help in implementing a needed change.  Hopefully, the above has demonstrated this. 

More can be found about the concept and use of force field analysis at the MindTools website. Click here to go to this website.

Use a Twitter Tweet Dashboard to Help Manage Your Business

An enormous amount of information flows down the Twitter electronic pike as tweets.   This continuous flow from thousands of tweeters – individual, company, and other organizational types – represents a unique source of information.  It seems to me that there has never been anything like what this flow of tweets represents with respect to information availability.

It is technically relatively easy to select a specific topic, for example, employee performance, and then to pull (filter) from the Twitter flow many tweets with relevant information on the topic “employee performance”.   If one is seeking what others know about employee performance, using Twitter as one source of information would be easy and likely productive.

Although, as stated above, gaining access to tweets on specific topics is relatively easy, what should one do who is interested in a broader subject, such as human resource management, under which employee performance is but one subtopic?  In other words, how does one filter Twitter for all tweets with information on the various subtopics that make up a broad subject area such as human resource management? 

An answer that I have come up with uses the idea of a dashboard consisting of several filters, each filter on a specific subtopic within the broad subject area.  Once set up, the dashboard can easily be brought up as a webpage and then each filter on a specific subtopic will be available to drill down for details in the tweets on that subtopic.  The collective tweet fitters will cover many, if not most, of the subtopics that make up the broad subject area of interest.

This idea of a dashboard of Twitter tweets seems to me to offer the possibility of being a good tool in managing various broad subject areas in a company.   Besides human resource management, other areas might include: financial management; benchmarking; sector analysis; environmental issues; governmental issues; and country and regional informational needs.

A dash board concept is used extensively in financial management of a company where the various components of a financial dashboard represent various financial and accounting data relevant to the company.  Collectively, the various filtered data (on the dash board) gives an overview of the financial condition of the company. 

Hopefully, the collective filters of tweets on subtopics of a broad area, such as human resource management, will also give useful information in managing the general area in a way not possible otherwise. 

Click here to go a version of this blog which shows the “Human Resource Management Twitter Tweet Dashboard”.  Shown at the bottom of the page are 7 subtopic Twitter filters making up the dashboard.  These filters were set up using Twitter creation tools on one of their web pages.   The subtopic filtered is shown at the top in the presentation box.   The presentation box presents tweets in real time as they are submitted in Twitter, and will cover tweets in the recent past (e.g. several days).   Clicking the link “Join the discussion” in the presentation box will bring up a complete list of the tweets related to the subtopic that have appeared in the recent past.

Twilert, a Twitter App, Should be Useful to Support Decision Making

Twilert is a free web app that enables you to receive selected Twitter tweets by email.  The tweets sent to you will have the keywords in them that you select. Twilert, which is easy to set up and to use, can provide you selected information that flows through the Twitter system.  This information could be useful to you in decision-making.

For example, many federal, state, and local government agencies now “tweet” (send out electronic messages) using Twitter.  These tweets contain information about the agencies’ services and actions that the agencies feel may be of value to the public, the users of its services and recipients of its actions.    These tweets can contain such information as pending regulatory and compliance requirements, information that is valuable for businesses to know about as soon as possible.  Twitter is a very efficient and effective method for agencies to electronically distribute important information.  And, for companies, who can benefit from knowing this information as soon as possible, using a service like Twilert could be very useful in being alerted to these tweets.

Monitoring Twitter for government regulations is just one example of what information, which flows down the Twitter electronic pipe, can be monitored by a company.   Other examples include:  software used by the company; products produced; services offered; markets targeted; retail products being considered for sale; and likely many others.

Perfecting and using skills to extract useful information from million of tweets that flow down the Twitter message pike will likely prove to provide many advantages to a company.  One easy to set up and use tool to begin monitoring Twitter tweets is Twilert.  Click here to go to the Twilert website.  Check it out.