In order for regulation and legislation to work in favor of small businesses, it becomes essential that accurate and complete information be available for analysis. Too often there are details not recognized in the information used by various agencies to help guide policy and action, and particularly in the world of privately held small business, the quality of data is often in question. This is where structured accounting software and the public accountant come in to play, and where a difference can be made not only with the individual client, but at a higher level by facilitating more accurate data production to support various research initiatives, such as those sponsored through the SBA and the Fed.
Overall, these research studies highlight two things: the important role that financial institutions play in lending to small business owners, and the value of quality data sets in ascertaining financing issues faced by small businesses and their owners.
Charles Ou, Ph.D. | Senior Economist | Office of Advocacy | July 2009
With the availability of highly useful tools for monitoring various key performance indicators and metrics in the business (with analysis of cash flow being an essential part), business owners and their accounting professionals alike are able to use real business data to reveal not simply the trends in business performance, but to identify areas where direct action could improve results in one aspect or another. By paying closer attention to managing business finances and analyzing key aspects of business performance, the “discouraged” or “denied” business borrower may become a successful or (even more valuable) a non-borrower.
via The Small Business Borrower at Biz2Credit.com.
Creating and keeping a competitive edge is critical to building a successful business. Developing a plan, monitoring the plan to make sure the business remains on target, and setting goals for growth and profitability are foundations of business success. But great strategy and detailed planning cannot ensure success because the economy and business environments are unpredictable; no amount of planning is a guarantee that bad things won’t happen and the business won’t experience challenges. On the other hand, regularly monitoring small business performance data can reveal trends and indications that things are not going as expected, and provide a basis for making the decisions necessary to get the business back on track and regain the competitive edge.
Business owners must be prepared to make adjustments as conditions change, acting on decisions made based on business performance data. Whilebusiness analytics are more important than ever, with businesses facing volatility in financial markets and increasingly globalized competition, finding a way to approach the matter is often the biggest barrier. The growing difficulty – the increasingly expanding problem facing business owners and their advisors – can be distilled down to three particularly noticeable trends.
The volume of data flowing into organizations is already high and is increasing.
The data is complex
The data lacks similarity (data is disparate)
The volume of information flowing in to businesses is already high, and is increasing steadily. With all the data collection applications and tools available, and as the business seeks to gain more information and intelligence from more sources, the volume of information gathered by businesses has increased at astounding rates. Technology has adapted to this need, allowing businesses to gather than store vast amounts of data. To be of value, however, the data must be analyzed tofind the answers to questions posed. What technology is only now beginning to address is the complex and disparate nature of the collected data. Coming from varying sources and in equally varying formats, data must be “normalized” and related for it to make much sense.
More Users
More business decision makers in more job roles and functions are getting involved
More people approaching the problem with their own “brand” of analysis
In a very small business, decisions are generally made by the owner. This is most often due to the fact that the owner is the person who not only knows what’s going on in the business, but is generally the one doing a lot of the work. As businesses grow and bring in personnel to manage various functions, these managers become decision-makers. Decisions are made in businesses at all levels, and as management layers are compressed, those “closer to the action” are being handed more responsibility for the decisions impacting their areas. Without a comprehensive and company-wide framework for data analysis and reporting, these individuals and workgroups find ways to capture and analyze the data they feel is pertinent to their requirement and within their own realm.
Less Time
Timeframe for making decisions is shrinking, and is shrinking at an “alarming” rate
The “velocity” (rapidity of motion) of business is increasing
It may be that, in some businesses and markets, certain decisions don’t have to be made with any great speed. Businesses or markets of this type are tough to find these days because the Internet, information technology and connected systems have all but eliminated the effects of time and distance. Just about everything in business today moves at a rapid pace, and that means that business decisions are often demanded on-the-spot, providing little time for detailed consideration and working through the problem. Without the tools and data providing meaningful real-time visibility into business performance, decision-makers may be able to act fast but not wisely, and are most frequently guided by their “gut feel” as to what the right move is.
Driving Small Business Analytics
Business decision makers are now recognizing the need to know more about the business and how it is operating and competing in order to effectively address the choices and decisions faced each day. The cause for this recognition may be due to variable elements, but the conclusion reached was the same: good business decisions require business analytics to support them.
Not surprising was the report finding – that the majority of small business owners felt pressured to adopt a business analytics solution primarily due to the fact that “critical business decisions rely too much on “gut feel”. Surprise! Other drivers listed were lack of visibility into operational metrics, the growing number of people in the business who want analytical capability, the business’s inability to identify and act upon business opportunities, and having less time to make decisions.
Steps to Get There
As with any business project, there are “degrees of success”, and the ultimate success of a business initiative requires that all parties be on board with it. Businesses who recognize a need to improve their analytical capability, but who do not then empower their systems, processes and people, will not achieve the same result as those who do.
Focusing on the business data, it is important to address both the volume and disparity by creating formal data management practices and policies, and implementing systems and processes which assist with the intelligent capture and storage of business information. Simply retaining the data is not useful; it must be presented and applied in a meaningful manner for it to become useful as decision-supporting information. The value of the information increases dramatically when it becomes truly useful to the business. Additionally, by empowering a broader framework for data collection and analysis, businesses extend the “intelligence” to others in the organization, supporting individual and workgroup efforts to make better decisions for their respective areas of responsibility. Of course, if the information is not provided in a timely manner, its value is reduced if not eliminated (hindsight may be 20/20, but that doesn’t help you see where you going to step next). Any approach to building business intelligence should leverage connectivity and integration to provide a timely delivery of complete information how and when it is needed.
What’s the Proven Benefit?
source: article
The obvious benefit of business analysis is that business owners are provided with data to help them understand more about the business operational and financial performance. The real and proven benefit is that the information provides a basis for gaining insight into trends and conditions which impact performance, and which support making the necessary decisions which facilitate improvement in various business areas.
The highest level of proven benefit, according to the Aberdeen Group report, was achieved by those businesses who embraced the requirement to know more about the organization and operation, and who implemented a focused effort at building business intelligence.
Fast Facts: Best-in-Class SMBs Achieved 24% year over year increase in new customer accounts sold compared to 12% for the industry average, and 11% for the laggards.
These organizations which achieved the greatest improvement operated from real data rather than being guided by gut and emotion, enabled the entire organization to participate in the development of organizational and business intelligence, positioned themselves to identify and act on new business and market opportunities, and ensured that those who must make decisions have the information and insightful data to support making the right ones.
Accounting pros, what your clients care about is how they’re doing and if they’re on the right path. Are you helping them understand that, or are you just the guy who works with the numbers to make sure they’re accurate?
Accounting professionals are having a hard time of it right now, with clients demanding more insight and assistance in helping to build value and profitability in their businesses, yet accounting professionals continue to be mired in the details of the numbers. It’s like the old saying about not being able to see the forest for the trees. You spend time in the trees, counting trees and making sure the trees are properly categorized, but are you seeing how this group of trees performs compared to others in the forest? The analogy isn’t that far off. You see, if there are other trees in the way, or if it doesn’t rain enough, the tree won’t grow and thrive.
This is what it’s like out in the world, where your business is just one of many. It’s not like you can grow and thrive no matter what others are doing. If they’re bigger than you and take all the light, then you can’t grow. If they take all the nutrients and resources, you can’t grow. If it doesn’t rain, you can’t grow. Somehow, some way, you have to find a way to stand above the others, get the light and the resources and the rain. Someone in the business should be paying attention to this bigger picture, and it is often the business owner. Their accounting professionals, on the other hand, tend to remain in the dark, below the sun, counting numbers because the owner isn’t interested in counting. The owner is interested in growing.
Accounting is about numbers, but growing a successful business is about numbers and strategy. Historically, the numbers tell you how the business has performed up to this point. Adding in the elements which speak to strategy, you can then look at what your potential performance will be in the future, and then make the necessary adjustments to make sure that the potential is realized. The accounting professional acting as a small business CFO must be prepared to help business clients look beyond the numbers to their meaning and what they say about the business today, factoring in elements relating to business strategy and market forces to reveal what they indicate about the future.
Accountants, it’s time to recognize that you are the only ones really worried about the numbers. Business owners just want to understand what the numbers mean and what they can do about them.
Reducing costs and managing expenses and cashflow is critical, yes, but how many business owners actually know what they’ll be up against when looking for financing, or a buyer? Or do they even realize that they’re not on the path they wanted… building something valuable they can leave to the kids? Sure, the cashflow may be there, and they’re taking a healthy monthly salary… but does that really tell the entire picture or show them where they’re likely to end up? No, it doesn’t, and every accounting professional knows that truth.
While it’s true that bad accounting data turns into bad decisions really fast, it’s also true that too many accounting professionals THINK their client’s don’t care about what the numbers SAY just because they don’t care about the numbers. I would suggest that maybe small business owners care far more than their accounting professionals recognize… and they care about building value and not just accurate digits. This is one of the reasons why KPI dashboards, dynamic reporting tools, and business valuation solutions are so popular among small business owners – they are able to have a conversation with their business data that their accountant isn’t having.
Can self-help reporting and valuation tools be useful to business owners? Well, that’s sort of like asking if trying to figure out what you’re worth (or not, as the case may be) will hurt your business. Information is power, and every business owner wants to believe they have the power to succeed in their own hands. Just because they’re not having this conversation with their accounting professional doesn’t mean they’re not thinking about it. Maybe they’re just not asking and the accountant isn’t offering.
Accounting professionals, go ahead and continue to monitor KPIs and crunch the numbers and show cash flow (real cash flow, not just today’s bank balance). But if your client had 1 hour per month to actually spend working ON the business (on the forest), trying to make sure their business is heading where they originally planned to go with it, wouldn’t it be a good idea to show them where to spend that time? Yes, it would, and adopting the use of realtime reporting and analysis tools for business clients can help do that.
Data dashboards and decision-support solutions are important tools which help business owners understand their businesses better. Rather than viewing these tools as dangerous or competitive, accounting professionals should view financial analysis, business valuation and KPI reporting tools as something they can use to help build value in the information they develop, rather than trying to convince clients that the value IS the information and not the guidance it suggests. The data won’t make the tree grow, it’s the guidance that feeds it.
I am a big fan of business analytical and reporting tools. I very much believe in using industry benchmarks as a means to understand various aspects of business performance as it is compared to others. I feel strongly that this type of information is essential at all stages of the business, and is useful for planning and forecasting as well as in daily business management. There are a lot of tools available now which provide KPI (key performance indicator) reporting, dashboards, and industry comparisons. The thing that none of these tools provides is an assurance that the underlying data is any good.
For data-driven reporting and analytical tools, the reliance upon customer- reported and accumulated benchmark data is both the benefit and the problem. Drawing upon actual customer financial data is what makes the reporting solution useful – reflecting the realities of the business as they are revealed in the accounting data. The problem is that the data will often be flawed in some manner due to the lack of accounting knowledge of the user. Particularly when small business owners take it upon themselves to perform their own bookkeeping work, there is a large potential for the information to be incomplete or erroneous, or at least not truly reflective of the business finances.
It is essential that accounting professionals be involved in the accounting process to ensure the accuracy of the information presented to any analytical and reporting solution, thus improving the quality and value of the information. Further, I would suggest that accounting and business professionals would look to these types of tools to assist in the identification of issues or conditions which exist in the business requiring attention. Business owners would get far greater value from the services of their accounting professionals, and accountants would deliver a much higher level of tangible value to their clients.
If the accounting professional is not regularly discussing business issues and conditions with the small business client, the client can use their own tools to attempt to gain the insight. HOWEVER (note the big letters), any small business owner who tries to do their own books and use their own decision-support tools is likely to run into problems. While it is true that some accounting professionals are not offering the level of guidance and insight (“value intelligence”) that some analytical and reporting solutions might try to offer a small business user, suggesting that the DIY reporting tool is useful when coupled with DIY accounting is questionable at best. Why? Because most small business owners and untrained bookkeepers do not know how to perform proper accounting. And bad accounting data turns into bad business decisions really fast, even with the coolest-looking reporting tool.
What’s the bottom line? The participation of a qualified accounting professional is necessary to make sure business bookkeeping information is properly accounted for, even and especially when great tools and solutions designed to help small businesses get their work done are being used. The accounting professional is necessary to make sure information is classified correctly, connected and associated with the proper supporting information, and that the data is complete. This is a lot of work if done on a regular basis (which it should be) yet many accounting firms don’t even offer the service, or offer it affordably.
Accounting professionals working with small businesses, look at it this way: it makes more sense for you to engage a contract bookkeeper and make a bit of money on the work they do to serve the client than it does for you to
a) lose the client to an accountant offering bookkeeping services, or b) charge the client to re-write up the information, which isn’t really profitable for you and isn’t as valuable to the client
Serving larger businesses may provide firms with an ability to be more selective of the services they offer, but small business accountants need to take an entirely different approach. Small business accounting professionals need to be full-service providers and help clients get the complete range of services they need, including daily bookkeeping.
Accounting professionals helping their small business clients get complete service – from basic bookkeeping to insightful planning and advice – that’s the benchmark for high value accounting in the world of small business. It’s the only way to make sure the numbers are right, and that the business owner is looking at the right numbers.
If you own and operate a business, you probably want to make it successful. Granted, success comes in many flavors, and there are also “degrees” of success, where maybe you do okay but not as well as you’d like (or not as well as your local competitor). Running a successful business, and crafting a business with sustainability and long-term value, takes information as well as know-how. Remember that information = power and you want to be as powerful as possible when it comes to running your business.
While today’s information technologies, mobile devices, and “everything as a service” have the capability to deliver way too much information for the average business owner to make sense of, there are a few areas of the business where investing in a little insight and reporting can make a big difference in the level of understanding you have about the business.
Rather than making decisions based on guesses or gut, business owners should use actual historic data relating to these are key areas (and key performance indicators) to help predict sales and order volumes, estimate cash flows, and forecast profitability.
Getting Customers
The “customer lifecycle” does not start when someone buys from you, it starts when they become a potential customer (often referred to as a target). Even before someone buys, your business may expend resources to expose your brand or product to them on websites, in advertisements, and through other marketing channels. These marketing efforts will (hopefully) result in the generation of qualified leads for the business to sell to. Unless the business understands the costs involved and the efficiency of the marketing and lead generation efforts, it cannot understand the actual cost of getting a new customer.
The next step in getting customers is turning a qualified lead into an actual paying customer. The business will want to keep track of conversion of leads into customers, along with sales data including total sales, number of items sold, and how items were priced. Powered by sales performance data, business owners can learn whether or not their lead qualification efforts are working, if their products are competitive, and if the pricing is in alignment with the industry.
Producing Work
When businesses operate, they essentially produce whatever work product their business model is designed to produce – whether it is a professional service, product, logistical support or whatever. Every business produces some type of work product. This is the operational aspect of the business, and business owners should want to know as much as possible about how well operations are running and how effective the operation is. This isn’t just the cost of production, (the yield expected for a given investment in materials or equipment), it is also about the quality of the product (customer satisfaction) and the quality and value of the service behind it (customer retention).
Keeping Money
Money (more specifically, cash and the availability of it) is the metric that most small business owners tend to focus on. It makes sense, too, given that most small businesses survive based on what they have in their bank accounts. Then again, looking at the accounts receivable and payable won’t tell the entire story, either. Business owners need to know how quickly their customers generally pay, and they need to know how much capacity or inventory they have before needing to buy or develop more.
The message underlying this entire discussion is that fact that you can’t analyze what you can’t quantify (no information = no power), so it is essential that systems be in place to capture information from the business and its activities. Further, recognize that it takes some skill and experience – perhaps from your trusted accounting professional – to put the information together so that it makes sense and is useful.
Make Sense?
J Measure, Manage and Succeed. It’s all about knowing how to speak the language of finance
Cooper Mann Consulting 