One Sherpa

In this series we’re going to look at all the reasons why the accounts of a business may not be telling the truth and why there are so many demands on the accounts that often business owners simply give up and ‘do their own thing’

Some of the topics which we will be covering are:

1. How does the timing of payments for items such as purchases affect what I think my profit should be?
2. Is my business a going concern and if so what items should I be accumulating?
3. How come the profit I make doesn’t show up in my bank account?
4. As a business owner, where do I report my drawings to make sure that I get paid by my customers?
5. What the heck is a balance sheet all about and why doesn’t it make sense?

I guess the obvious question is: “Should I have an expectation that my books will give me everything I need to know about the numbers of my business”?

Intuitively the answer is NO, but there seems to be an expectation that they will.

When the books make no sense, business owners usually give up on them as a tool for running their business, and go back to running the business more intuitively. Then on the appropriate occasions they make sure the books are completed to comply with the tax rules so they can file tax returns.

I do believe that the books can be the best overall place to derive financial information from, BUT only if they are prepared correctly. Often the book keeping is delegated to an administrative low level person in the company and as a result mistakes and omissions can occur.

Sometimes a business simply can’t afford to have a fully qualified accountant in their business and as a result they tend to run cash books rather than proper accounting books which are the easiest way to prepare tax returns.

Computer programmes such as MYOB and Quick Books are designed to produce proper books but they’re only as good as the information which is put into them and again most of the focus is on getting tax information correct.

My experience from over thirty years in this space has taught me that it is more likely that the books are incorrect than correct. Also I have far more faith in the business owner knowing intuitively what’s going on than taking their books as the definitive answer for what’s really happening in the business.

This may sound a little controversial but it’s the truth. Many businesses have a desire to get their books correct BUT that can be a journey and while that journey is taking place there needs to be a method of working out what’s going on!

In my next post I will be discussing a way we have discovered to give business owners a powerful snapshot and diagnosis of what is actually going on in their business without the need to complete a formal set of accounts.

On Friday, I introduced you to the second of three keys for ensuring you succeed in these changing economic times, and that was, “Make sure you are empowering those people who are really running the business.”

Today I want to talk about the third key, but before I do let me take a few sentences to reflect on the gale blowing through the financial markets.

A dip? A pothole? A sinkhole?

It seems that we’re in for more than a small dip on the economic horizon. We’re in for completely different economic times!

This morning I was with a client who has been around for a while and was recalling the economic hard times right back to the 60’s. He did comment that we’ve been on an economic run now for the last 18 years. He remarked — and I agree wholeheartedly with him — that for many managers this will be a completely new experience.

Think about it for a minute.

What were you doing 18 years ago? For most of you, it would be something quite different. Your position and scale of responsibility will have been very different from today. That’s why we’ve started blogging in the way we have been. I foresaw current events back in March and the “proverbial is only now hitting the fan.” It means we at One Sherpa weren’t having a lend of you when we outlined the need to acquire new skills for managing in the new environment.

Somehow we got the title for the Summit right on the mark, which is ‘Critical skills to rise above uncertain times.’

Anyway, back to my third key…

“Make sure that you know where and how your profit is being made.”

As I was saying above, we have been on an amazing boom time for the last eighteen years and as a result many of the management practices that were necessary in hard times have become completely irrelevant and lost from the skills repertoire of managers.

In the good time it was simply a matter of increasing your sales as fast as you could, and the profits would generally follow along, even if the cash flow was tight. It was not necessary to know where you made your profit because it all just seemed to work itself out.

In the economic times ahead it will be more important to know exactly where you make your profit. There will be far less room for error and non-profitable products and services will need to be eliminated from your business to first survive and then to continue making satisfactory profits.

At One Sherpa, we determine a company’s performance by looking at the movements in their profit, broken down into three separate elements:

• Price/Cost Inflation,
• Cost Productivity, and
• Volume/Mix Change.

Business owners have not been concerned about this type of breakdown (recently) because inflation has been low, volume has been high and businesses have generally run along OK.

Think about the level of cost increase running in your business… Has it increased? What about the effects of the petrol price increases? How have increased interest rates affected the households of your employees? What about the massive increase in the cost of food?

We used to be able to manage with only one major factor – volume increases — because the other factors were not significant enough to make a material difference. Not any more! In the new environment we will need to look at all three factors and understand why and how they’re affecting our day-to-day business.

I would like to ask you to consider adding your thoughts and relections in the comments area below. One of the reasons for blogging is to increase the interaction and cross-fertilisation of ideas. I really appreciate your thoughts and comments and if you are able to share them in the comments section of the blog it would increase the value of the articles and give others the benefit of any thoughts and feedback you might have.

I look forward to seeing you at the Summit on October 17th. Come ready for a day to remember and some take-away value that will assist you chart your way up your own particular mountain.