From day one, a business owner has been told they need to care about the financial statements. If an owner attended business school, most classes reinforced the idea that financial statements were the holy grail of information. If you listen to any business media coverage, they constantly talk about revenue, earnings, and EBITDA.
As an accountant and virtual CFO, I am not here to debate that financial statements are essential. Financial statements provide important information and allow for analysis to be completed. However, financial reporting can fall short for business owners.
A business owner needs data to run their business. While a certain amount of “gut feel” is needed, not using data can result in running into blocks. Financial statements provide great information, but owners need more than balance sheets and income statements. Further analysis must be completed to get the most use out of financial statements.
Further, the financial reporting process is not set up to capture all relevant information. Questions such as “How many repeat customers did we have this month?” or “How utilized was our workforce?” cannot be answered using financial data alone.
Below I discuss three different areas financial reporting cannot be relied upon to give a business owner the complete picture.
Financial Ratio Analysis
Financial ratio analysis is a process in which two or three different financial numbers are compared. Once this is completed, the resulting ratio can be especially useful when compared to prior periods or other competitors.
Not all financial ratios are relevant for a business to review. For instance, in a service business, return on assets isn’t a particularly useful ratio.
I have a few ratios that I like, no matter the industry.
Financial ratios are perfect for reviewing marketing expense. There are a few different ways to examine the effectiveness of marketing. One of my favorites is to review for every $1 in marketing expenses, how much revenue was generated? Compare this to other competitors or prior periods. This ratio can be powerful in telling a company how effective their marketing is or identifying issues with the current strategy.
Another analysis I like looking at is net working days in accounts receivable, accounts payable, and inventory. I often refer to this as “cash gap” (read more on this concept here). By looking at the number of days worth of receivables or payables outstanding, you can get some crucial hints about working capital. For instance, do they need to put a process in place to speed up their collections? Many owners like to pay their bills as fast as possible….this may not be the best idea most of the time. It can also show if a company has a glut of inventory on hand.
These are just two of my favorite ratios. Looking at a raw financial number many times has no relevance. However, taking that raw number and converting it into something meaningful is when a business owner can make their financial reporting more powerful.
Evaluate the Efficiency and Effectiveness of your Staff
In any service industry, utilization is an important measurement. At a basic level, utilization rate measures what percentage of your employees’ time is on work that is billable to a project or client. For instance, if you work in a law firm and you have an employee with a 65% utilization rate, that means they spent 65% of their time billing their time to a client.
Utilization can give a business owner, so many important data points to run their organization. For instance, at an accounting firm I used to work at, we had both individual and departmental utilization goals. Our individual utilization was available for all to see. On an individual level, if someone had too low of a utilization rate, it might signal there isn’t enough work for them or potentially they are getting through their work quicker than others.
At a departmental level, we had a goal of 65% utilization. That might seem low, but administrative tasks, vacation, education, and everything else that isn’t billed to a client takes time. If, as a department, our utilization was 75%, that may indicate we need more personal. On the flip side, if our utilization were only 55%, it would indicate maybe we had too many people.
An outsourced CFO or high-level accountant can be vital in helping establish a system to track utilization. Utilization is not a metric that is captured or reported in most financial systems. However, by tracking utilization, a company can increase billings, decrease employee waste, and ultimately run a more effective organization.
Reporting to Drive Revenue Growth
Revenue reported on a financial statement is often the end result of many inputs and strategies. As a result, looking at a financial statement will not tell a business owner much about how to grow their revenue.
Business owners accumulate so much more customer data than they realize. I am amazed that small businesses don’t use this data more often. Go ahead and type into Google “Big Data”. You will get stories of how many large companies are using this data to predict customer trends better and drive revenue growth.
Most smaller businesses don’t realize they have access to similar data.
At a small franchise company which I am also the CEO of, we use data to help us drive revenue growth. When I took over in 2015, I had a mission of building a better customer. Various statistics tell how much more expensive it is to acquire a new customer than drive revenue from a current customer. I can attest first hand that those are true. As a result, we wanted to use data to build a better customer.
Every month, we now report on new customers versus returning customers. We also report on marketing costs to current customers versus costs spent to acquire new customers. The difference is often staggering. Lastly, we report metrics such as the age of our customers, the distance they drove, and average basket size.
By tracking this information, we know better how to reach out to customers and set strategies to maximize revenue while reducing costs.
Most of this is hybrid data. The data can’t be tracked from one system. We have to combine data from our customer loyalty system and financial system. To track this information, systems must be put in place, and someone familiar with numbers and analytics must be utilized to put the information together. A virtual CFO is a perfect fit.
Financial Reporting is Not Enough
Businesses are often run on thin margins. Many industries are in a race to the bottom as they compete on pricing.
Business owners of any size need to have tools available to make decisions. Just because a business may be the “little guy” doesn’t mean they don’t have the tools in place to become a smarter business.
Financial reporting is often the result of many different factors. If a business is not measuring the inputs that go into the results, they are not putting themselves in the best position to compete. The ironic thing is that with the systems in place and technology available in today’s environment, business owners that consider themselves the “little guy” are now just making excuses.
About Krieger Analytics
My name is Matt Krieger, and I am the founder of Krieger Analytics, an accounting and advisory partner for small businesses and franchisors. Our goal is to completely outsource your accounting department from bookkeeping and taxes to CFO advisory services. I am also the owner and franchisor of a concept called Monkey Bizness, in Denver, Colorado.
As a small business owner with a background in finance and strategy, I realized the benefits that a CFO could bring to smaller organizations. Most franchisors and small business owners don’t have a need (or budget) for a full-time CFO or bookkeeper. To better fit my clients, Krieger Analytics is a part-time resource. Many think of CFO’s being involved in finance and accounting (we are), but we are also involved in much more. We partner with clients by coaching, giving them clarity into their business, and creating growth strategies. Conversations are free, so don’t hesitate to reach out to me at [email protected].