1. Accounting: A Necessary Evil?
Many of the small-business managers I know view accounting this way. It's overhead and really doesn't contribute to the bottom line. Or does it? The people who run the accounting system speak in an unintelligible blur of debits and credits. They have little grasped of the operation that generates the money to pay their salaries.
Sound familiar? Maybe you're one of the entrepreneurs who share these thoughts. Welcome. I'm not out to convert you to the good of accounting. However, my guess is that once you see how to set up an efficient accounting system for your small business-one that really does contribute to overall profitability-you'll convert yourself.
2. Information Means Profits
the purpose of the accounting system is to communicate. It produces useful information (not raw data) that tells specific things about the company. To those who understand what this intricate system is saying (and you'll be one of them by the end of this book), it's like money in the bank.
Suddenly, information that you need to run the company is at your fingertips. Of course, this information is couched in financial terms. That's the language your accounting system uses. But it's not complicated and-with help from this book-it's not foreign. Here are two examples that prove this.
a. Overdrawing TDO's Bank Account
TDO Enterprises fabricates the chassis boxes for computers. It always seemed that there wasn't enough money in the bank to pay the bills. A quick look at the aging of accounts receivable revealed that customers paid on average two weeks after the time stated in the terms of sale.
Rather than dip into its line of credit again, TDO's solution was to mount an aggressive collection campaign. The company used its accounts receivable system to monitor progress toward getting and keeping customers current.
Within the space of two months, TDO's bank account balance had risen to a point where it could pay its bills regularly without having to draw on its credit line.
b. MAG's Eroding Profit Margins
MAG Partners, Ltd. sells grass seed on a wholesale basis. Profits recently turned down for no apparent reason. However, the partners were savvy enough to investigate the sales department's ability to pass on recent price increases to customers.
Comparison of the sales prices for MAG's grass seed with what MAG had to pay for it showed a 20 percent decline in gross profit margin (sales - cost of goods sold = gross margin). The solution was to dock sales commissions for the amount under the company's list price. Profits miraculously rebounded
T0 Be Continued……..