by Intuitive Digital | Nov 12, 2013 | Advice
Today’s post comes from my friend and guest blogger Eric Williams, a business broker with Codiligent, LLC. Eric wrote the following:
“I’d like to share a cautionary tale about financial fraud – something that is more prevalent than many people believe. I have a friend who owned a second-generation, multi-state-location manufacturing company and after decades of successful operation he needed to replace the business’ retiring controller. He was very excited about the new controller – someone with impeccable credentials and experience. One of the first things the new controller suggested doing was to replace their old accounting and operations software, with a fully integrated Enterprise Resource Planning software program. The implementation was complicated, took months to get people fully trained, and my friend never became comfortable with the data he was getting from the financial reports.
After about another year, the owner still wasn’t getting information from his controller that he could understand, particularly given that their numbers seemed different than he expected based on his experience with the company’s production level. The owner assumed that he simply was not sophisticated enough to understand the controller’s financial explanations, so he brought in an outside consultant to help him understand things better. To his shock and dismay, the outcome of hiring that consultant was that fraud was discovered. After a lengthy secret review they determined the source of the fraud was the controller, who was promptly fired and prosecuted.
Unfortunately, terminating the controller didn’t immediately solve the problem. Untangling and correcting the problematic financials and operating system required significant time, effort, energy, and focus. When combined with the time necessary to implement new systems, hire a new controller, and prosecute the former controller it required about one-and-a-half years during which time the business would not have been very marketable. After they corrected the problem and had another two years of problem-free operations they sold the business.
The problem with fraud is that victims assume it isn’t happening to them, or that their trustworthy employee would never do such a thing.”
by Intuitive Digital | Nov 7, 2013 | Advice
This post continues our discussion of key metrics that business owners should focus on to increase profitability. The information in this post comes from a newsletter published by Bill Billingsley, a business broker and owner of The CBB Group, Inc.
Below the Line Expenses
In the accounting world, expenses that occur as a result of a company’s major or central operations are classified as operating items. Items such as revenues and costs of goods sold fall under this category and are considered as “above the line” expenses. Expenses from peripheral or incidental transactions (such as gains and losses from asset sales, lawsuits, changes in market values, etc.) are classified as nonoperating items and are reported as “below the line” expenses below the EBIT line (termed simply “below the line”).
For business owners, measuring your below the line expenses as a percentage of revenue serves two purposes. First, it allows you to determine if your expenses are in line with current revenue levels and second it can be used as a supplemental measure of efficiency.
Customer Concentration
Business owners should measure the percentage of revenue that each customer represents. If any one customer occupies more than 10% of your company’s revenue, this can pose a risk to continued profitability. Buyers are particularly sensitive to this issue unless they are industry buyers who are knowledgeable about the customer base.
Customer Profitability
Understanding how profitable your customers are can take time and effort to determine, but doing so can lead to immediate increased profitability. An added benefit is the ability to build an ideal customer profile that allows you to better focus your sales and marketing efforts.
Product Profitability
Like customer profitability, understanding the profitability of your products and services is essential to driving long term success for your company. Firing a customer or discontinuing an underperforming product or service can be difficult but may be far more profitable in the long term.
The metrics discussed in the last two posts may not all apply to your business, but measuring the ones that do matter can be the key to increasing short term profitability and long term success.
by Intuitive Digital | Nov 5, 2013 | Advice
Management consultant Peter Drucker famously said “If you can’t measure it, you can’t manage it.” Bill Billingsley is a business broker and owner of The CBB Group, Inc. After years of working with small business owners, Bill has found that owners often get caught up working in their business rather than on it. As a result, he says, most owners don’t take the time to look at the metrics that drive their business and how they affect the value of the business.
Bill has identified seven key metrics that are common to most businesses. These are the metrics that every business owner should be managing because they are also what business buyers tend to focus on. We’ll discuss each of those metrics and explain why they matter in the next two posts.
Here are the top three metrics for business owners to measure and manage.
Profitability
This is the metric that most business owners looks at each month. Buyers also look at profitability as a percentage of revenue. This allows a buyer or an owner to evaluate and compare the company against its competitors in the same industry niche regardless of size.
Gross Margin
Knowing what your gross margin is on a monthly basis and the major components that make up that margin allows business owners to remain focused on managing the costs of goods sold (or services provided). Having a gross margin that meets or exceeds industry averages is one of the top drivers for increasing value that a buyer will pay for.
Revenue
Tracking revenue month over month versus the same month in prior years is essential to evaluating your current marketing and advertising strategies as well as sales force performance. Buyers will look for positive trends, seasonality and size when valuing a company.
