Cash Investments are Critical for Growth – Make Them Wisely

Cash investments are critical to a company’s growth.   Cash investments can lead to increased revenues and/or decreased costs, leading to higher profits, and growth.  So, decisions about what investments to make are critical to your company’s future.

This blog suggests using a quantitative approach to making decisions about how to invest cash for growth.  Think in terms of the affect that the investment will have on profit by increasing revenues or decreasing costs.   Quantify these changes in revenues and costs in dollars and than divide these changes by the dollar amount of the investment made.  The result will be the return on the investment.  Have in mind a minimum return on investment percent (e.g. 5%, 10%, or greater) that you will required before you will make the decision to invest.  Use your financial statements for support in making investment decisions.  Consider each line item on the profit and loss statement for where increases or decreases can result from investments.   Accept that too low a return is not worth the effort.  Rather look for other investments with sufficient returns.

Return on investment calculations need to be based on reasonably accurate estimates of gains (the increased in revenues less costs) divided by reasonably accurate estimated costs.  Too often the return on investment determination is flawed, because the estimated gains and costs are incorrect, leading to a wrong rate of return. The return on investment concept for decision making should only be used when there is a clear amount of investment and a quantifiable gain and cost that clearly and unambiguously results from the investment.  Otherwise too much uncertainty exists about how the investment correlates with the gain.

Accounting systems such as QuickBooks and QuickBooks Point of Sale can be used to determine the return on the investment for each item of inventory that is sold.  Reports in these software packages can show total costs (investments) and total profits (gains) form the inventory item sales.  From this data, investment returns can be calculated showing those inventory items that are most profitable.   Investment return percentages give a more pronounced picture of the differences in gains from sales than gross profit margin percentages and, in that respect, can be useful for decisions related to inventory investments.

Besides inventory investments, investments in creating new products or services, in marketing, in adding personnel (where the personnel can be clearly tied to increased revenues, such as sales personnel), and projects with clear, directly-related costs are likely investments for return on investment decision-making analysis.  Remember, be as accurate as possible in estimating these gains (benefits) and the costs of the gains. And implement only the investments with sufficient returns.  Where limits on investments exist, choose the investments with the best expected returns.

Other factors need to be considered in addition to the percentage rate of return of an investment, not the least of which is the risk associated with the investment failing to meet the expected gain.

Try to keep in mind that computing investment returns in your business should be straight forward, not unduly complicated and complex,  and fully understandable by you.  Although good estimates of gains and costs are important, absolute accuracies are not so critical such that determining the estimates become a lengthy, complicated, painful, and costly exercise.  Rely on good judgments and common sense in estimating the gains and costs.   Whether the return is 15%, higher, or even lower, the decision to make the investment in your business will help your business.  What is important is to be in the right ball park, e.g., the result that the return is above your lower limit for a return, rather than in the wrong all park, meaning there is no return, and therefore a bad decision.

Lots of information can be found on the Internet about returns on investments, their calculations, and other factors about there use.  Finding this information is relatively easy, and from the information you can begin your education about using returns on investment for decision making.  

Keep Your Eye on the Competition

A critical function in your small retail business is to know and analyze details about your competition.  Such knowledge and analysis can help you make better decisions so that you can become more successful in attracting the customers you want.

Here are a few details that you should know about your competitors:

1.  Know your competitors’ stores.  What signage is used?  How are the signs used and are they successful?  How are shelves designed and used?  What is the feeling in the store derived from such attributes as lighting, flooring, walk areas, entrance and aisle space, wall coloring, and decorations?  What are the store hours?

2.  Know your competitors’ check out procedures.  Is the check out efficient?  Do long lines accumulate?  Why?  Are the cashiers friendly and polite, do they smile, make welcoming comments to the customers?  What check out and payment technology is used?

3.  Know what products are sold, their prices, the stores’ discount policies, and loyalty and coupon programs.  Analyze these policies and programs for what they are trying to accomplish and how.

4.  Know the marketing done by the competitors.  What newspaper, radio and other media are used?  What brochures, pamphlets, and other documents are available for distribution?

5.  Know who the suppliers are.  Hang out (or have someone else hang out) around the stores to take notes on suppliers.  Once suppliers are known, research the suppliers, e.g. at their websites and at other sources, to compare competitors' suppliers to your own.

6.  Know the competitors’ internet presence.  Do competitors show ads when a search is done for such a business in your market area?   Do the competitors show up on Google and Bing local map listings and on Superpages, Yellowpages, and other local listings designed to help the searcher find businesses?  Are the competitors’ websites easy to navigate, to find contact information?

7.  Know the customer traffic at the competitors’ stores.  Hang out (or have someone else hang out) around the stores to take notes on the customers – the numbers, ages, genders, social levels.  Take notes on what customers seem to be buying, the quantities, and when.

8.  Know what customer services are provided.  Are employees on the store floor to provide assistance?  Are employees friendly and helpful throughout the stores?  How many employees are there?  Are there too many, not enough?  What employee turnover exists (are help wanted ads appearing in the local media)?

9.  Ask your employees, suppliers, family, and friends what they know about the competitors, what their evaluations are of the competitors, what they might suggest about how the competitors compare to your business.

10.  Use your local library and the internet to find information about the competition.  Many local newspapers now have been digitized so that they can be easily searched by keywords (e.g. competitors’ names).  Past information appearing in newspapers could be useful.

In the knowledge and analysis from the above, compared what you discover to your business situation.  Think about the comparisons and how what you now know can be used to improve your situation.  Think about how you should respond to what the competitors are doing, what they might continue to do, or implement, that will affect your situation.  Are the competitors not providing something that you could provide, or provide better, to gain customers?

Record what you learn and your conclusions and keep for future use.  Update what you have recorded periodically, e.g., at least once a year.  Think about how complete and reliable what you discover is and what you can do to gain more completeness and insights.

Consider hiring a sub-contractor for help in gaining knowledge, information, and analysis about your competition.  Independent information professionals specialize in just such tasks.  A good source for finding such a professional in your area is the Association for Independent Information Professionals.  Click here to go to this association’s directory of information professionals.

The well-known Harvard Business School Professor, Michael Porter, has gained a world-wide reputation on his conclusions about what drives competition.  You can read some of what he a writes by clicking here (PDF file).  His insights can be thought-provoking for you.

The British Newcastle Library has written an article about questions to ask about your competitors.   Click here to read this article (PDF file).  Troy A. Festervand and Jack E. Forrest at Middle Tennessee State University outline a program related to knowing your customers.  Click here to read this article (PDF file).

Important decisions you make are best made when informed by good information and analysis.  Some of your most important decisions will be about how to run your business based on what the competitors are doing.

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.