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Banish One Step Thinking – The key to better understanding (Part 1)

By on April 14, 2009 in Management

What would it be like for you if you only had one leg?

How would walking work for you?  Probably more like a hop I suspect!!

This is how many people think about the money side of their business.

They never think about the ‘other side’ of what they’re doing.

Cause and effect never enter their minds because they’re completely focused on the single task at hand.

Let me give you an example:
When you make a sale, what do you get?

The answer you may have come up with was CASH,
but in most circumstances you get an account receivable.

It is a two step process to get to CASH!

How about when you make purchases?

Most of you would hope you could get the goods on account
and then at a later stage pay the supplier.

Again this is a two step process.

Now the fun begins in bringing these two types of transaction together.

In a business most people want to know what their profit and loss account shows them so they try and match their sales and purchases together to see what profit they made.

BIG PROBLEM
For many people this is a complete miss match because they use a two step process for their sales and a one step process for their purchases.
What do I mean by this?

Most computer programmes automatically do a two step process for sales.
When it comes to purchases the same is offered but people choose to ignore the accounts until someone is screaming at them to pay and then AFTER paying they enter the amount into their books.

Think about it. What sort of profit and loss account is this going to produce?

A miss match of sales and purchases which will tell the business owner absolutely nothing about their real profitability!

The learning here is to make sure that you use the same process for sales and purchases in your books.  There is another step which I’ll talk about in the next post which relates to matching real sales against cost of sales.  This is different to purchases so look for part 2 in this series.

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Empowerment – The Key to More Success

By on April 6, 2009 in Management

Lately I’ve been thinking about words that contain a hidden meaning within them which can open up better understanding and success.

One of those words is EMPOWERMENT which is a term often used in management and business today. Everyone wants to empower others to help them but unless correctly used it can lead you no where.

If you look at the word like this EM – POWER – MENT and strip away the syllables EM and MENT you’re left with the hidden word POWER.

The secret in empowerment is to delegate the power to someone else and if you want to hold onto the power then effective empowerment does not take place.

Think about all the places where this might apply to you.

    I want some one to help me with the books of the company BUT I don’t want them to control the money.
    I want to have sales people working for me BUT I don’t want them to negotiate terms.
    I want to employ a manager for my business BUT I still want to have a level of veto on everything they do.

What level of empowerment has taken place?

Giving others the power to act and do things is the secret of effective empowerment.

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The Jekyll and Hyde of the Business Owner

By on April 2, 2009 in Management

You know that there’s a little bit of Jekyll and Hyde in everyone of us who are business owners.

May be you don’t believe me but think about this example.

When you’re about to lodge your tax return how high would you like your profit to be?

When you want to value your business to tell someone how well you’re doing in business how high would you like your profit to be?

Unless those two analyses come up with exactly the same number you’re in the same boat with the rest of us.

You’ve got a little Jekyll and Hyde in you as well.

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A NEW LANGUAGE

By on March 16, 2009 in Management

I was down at a client yesterday talking to the Chief Financial Officer about The Financial Fence and why we report things the way we do.

It occurred to me that the fence is moving away from being a financial tool to being a management driven tool which just happens to include the key financial figures for a business. It’s driven by management language rather than financial language when thinking how numbers relate to one another.

So many financial numbers are subject to the thinking of the accounting profession which often doesn’t make sense to operational business people.

As an accountant I sometimes struggle to forget the way I think and get into the world where most people think.

Blank looks from people are not new to accountants. I’m sure we’re almost numb to them because for so long the numbers have remained a mystery to many business owners.

If we could become more relatable, oozing with understandable information and open to trying things a new way then we’d probably add more value to businesses.

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What the heck is a balance sheet all about and why it doesn’t make sense?

By on March 6, 2009 in Management

Lots of people get confused by balance sheets because they have no idea what they’re meant to represent.

Have you ever done a project? What was more important; The project milestones or the project plan?

When you compare this to financial accounts, the milestones are balance sheets and the plan is the profit and loss account.

So you can see that a balance sheet shows you where you’ve got up to. It shows you what you’ve accumulated in your business.

So why don’t they make sense to most people? Because accountants often prepare them using the wrong format.

You may have seen a balance sheet that shows; Assets minus liabilities equals Equity.

This is the most common form of balance sheet and also the most unhelpful in the 21st Century.

Here’s how we do balance sheets in the 21st Century.
Working Capital Plus Fixed Capital equals Debt plus Equity.

Think about buying your first home.

Probably looked like this:

    Home (which equals Capital).
    Paid for by:
    Debt (borrowed from the banks),
    Plus
    Equity (contributed by you).

That’s how we do balance sheets because they make sense to the average person who has bought a home. It’s very easy for them to understand.

Think about your business for a minute:
You will have working capital (Inventory, accounts receivable, accounts payable, employee provisions etc.

You will have fixed capital (plant & equipment, motor vehicles etc).
And these will be paid for by:

    Debt (borrowed from a bank) and
    Equity (which is your wealth tied up in the business).

When you do balance sheets like this it becomes easier to understand what you’re accumulating and how you can use this to help you run your business.

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