Poorly structured financial reports stymie a company’s forward movement, but there exist steps CEOs can take to fix the problem.
In my last blog, I noted some 80 percent of small and medium-sized companies are hamstrung by poor financial reporting. If you are the CEO of a company suffering from this problem, I urge you immediately take the step of convening a very serious meeting with your in-house or outside accountant.
As a CEO, you may not know exactly how to classify revenues. But you do know that understanding how much revenue is coming from each of your product lines is imperative. Convey that objective to your accountant. It may require your in-house accountant work with your outside accountant to restructure the chart of accounts used to code and classify transactions in the financial statements.
Once you’ve gone this far in segregating revenue streams, you will next want to learn the gross profit associated with each of those streams. This will help determine which revenue streams should be given additional effort and capital to make them even more robust, or if entirely new streams should be launched.
In addition, you must discuss with your accountants the proper classifications of expenditures. This decision will help determine what direct costs are associated with generating each revenue stream, and what overhead costs exit.
Once you as CEO understand what you are hearing from your internal and external accountants, you will better understand where all this time and effort is headed. It is headed toward creating a vastly improved reporting system, with the objective of using it to make better-informed decisions.
I’ve seen some CEOs react with shock when presented with never-before-segregated revenue streams and their associated costs. “Oh my God!” they exclaim. “ I’ve got to eliminate some SKUs, some product lines. They’re just not profitable to continue selling.” Or, they may respond, “The margins on some of these SKUs are just so low that I will have to increase my prices.”
Now you can look into each stream, examine the number of items comprising each of those streams, and decide which SKUs don’t justify any additional sales effort.
What’s more, if you know you have a good product the marketplace clearly wants, you can make a better decision on adjusting its price.
It all comes down to better informed reporting. As CEO, you can now devote your energies to building profitable sales growth, and sleep better each night knowing your numbers make sense.
If you’d like to sleep better at night, get in touch. I offer a 100 percent guarantee on my work. I take on only clients I can help. Call me and let’s talk about your business. My phone number is 630-269-7646.
In past newsletters we’ve focused on finance, marketing, getting out of debt, sales, and establishing a sustainable growth rate, so it’s time to look at your product line. For some, the statement “more is better” sums up their philosophy on an effective and profitable product line. But that mantra is missing a key word: profit.
To maximize your resources and profit, regularly review your product line and note your low-profit-margin items. Continuing to carry low-profit-margin items in your product line will depress your profits and hold your potential profit margin down. Typically, these items use up valuable (and perhaps limited) resources that could be more profitably used elsewhere.
Tom Monaghan, founder of Domino’s Pizza, tells this story about his first pizzeria:.
“One night, most of my employees didn’t show up, and I didn’t know whether to open or not. Someone said, ‘Why don’t you just cut out the six-inch pizzas?’ We had five sizes, but most of our business was the smallest, the six-inch. It took just as long to make as the big one and just as much time to deliver, but cost less. We never got busy that night, and yet we made 50 percent more money than we ever had. The next night I cut out the nine-inch pizza, and all the bills caught up. I learned then that keeping things simple could be more profitable.”
Business owners should continuously ask themselves two questions:
- How do I increase my business’s most profitable activities?
- Is it really worth it to maintain the low-margin activities?
Sometimes a business owner can be too involved in the daily operations to find the time for review and evaluation of their product line profit.
CFO-Pro can help business owners sort out the low-margin items.