- July 21, 2019
- Posted by: Dan Gordon
- Category: Accounting Advice
Everyone wants a large profitable company that could fetch the maximum value for its owners should they want to cash in their chips. Growth and profit are components of the box score in business. Firm value is the pot of gold at the end of the rainbow. If you are looking to build a high growth profitable firm that garners the most in terms of value in 2020 you need to focus on the three strategies below.
- Information is Critical – Design a Meaningful Chart of Accounts
Creating financial goals are vital. Having a standardized method to measure actual results against these goals begins with creating a chart of accounts (COA) that considers your objectives, your “actuals to budgets”, as well as your comparisons to others in the industry. When designed properly your COA will allow your Profit / Loss and Balance Sheet to provide you with laser guided visibility into the health of your business.
A COA is a series of codes categorizing all money that comes into your business and all money that goes out of your business. It gets set up and maintained in your general ledger system. Most of our clients use QuickBooks.
- Keep that Gross Margin over 50%
In retail, gross margin is an easily calculated number. It’s the difference between how much you purchase a product for and how much you sell the product for stated as a percentage. Example: You sell a widget for $100 that you purchased for $60. Your gross profit is $40 ($100-$40) and your gross margin is 40%.
Why is this number so important? It’s because the total gross profit on all products sold initially is used to pay off overhead (fixed costs). Once overhead is paid off also known as the break-even point, you begin to make profit at the rate of gross margin times the sales price of all items sold in excess of breakeven. The gross profit contributes to paying off overhead and once paid off the gross profit contributes to net profit of the firm. This is the reason many accountants refer to gross margin as contribution margin. The above concept is known as breakeven analysis and is one of the elementary cost control and pricing strategies taught at business schools.
As you increase or decrease selling prices while holding product cost constant, your gross margin rises or falls and therefore your breakeven point in number of units to be sold increases or decreases based on selling price.
Sounds good for a product-based firm, but we are in the service business. We don’t produce widgets or any other product for that matter. In the pest business, I like to call our product – hours of service. So, if we can make 50-55% gross margin on an hour of service that is the sign of a well-run pest control company. For a more detailed discussion and a video presentation on Breakeven analysis for the pest industry see our website https://pcobookkeepers.com/accounting-videos-pco/.
- Arm Yourself with Accounting Information from the Office of the Future
Today’s business owners and managers are smarter than ever and demand an ever-increasing amount of real time information. They embrace technology, digital and social media and can make decisions quickly based on financial and operational dashboards. What we have noticed at our accounting firm is that to flourish we need to be able to accommodate their thirst for services and information in a much different manner than in the past. We’ve noticed that clients are using technology in many ways to quench this thirst for real time information.
Paper is out, Digital is in – In our experience today’s management overwhelmingly prefer digital document storage over paper. Customer estimates, communications and digitally stored documents are becoming the norm for efficiency and cost savings. Important papers from accountants and lawyers are also being stored and retrieved in this manner.
Rather than calling the accountant or attorney to get a copy of a financial statement or a tax return, accounting firms and law firms who have also gone paperless provide access to data vaults that are encrypted and provide tiered access to clients depending on their role within the company. For example, the owner can view tax returns, personal financial statements, corporate governance documents and other sensitive information while the general manager may only have access to operational or sales reports. These data vaults allow client companies full access 24/7 without having to wait on a document request from the accountant or lawyer.
Cloud Based Accounting Systems – Companies who use cloud-based software know that it provides flexibility in terms of 24/7 access anywhere and anytime there is internet access. Cloud solutions are usually subscription based, making the monthly fee predictable. The most advantageous aspect of a cloud application is that there are no updates to install and the user is always plugged into the latest version. Since the application is hosted remotely all users log in and are instantly connected in real time. Most of our clients use QuickBooks Online which is easy to use, is reasonably priced and provides powerful reporting.
Outsourcing non-core competencies such as bookkeeping, bill paying and invoicing – Companies are becoming more comfortable with outsourcing non-core back office tasks to save money and focus on sales and operations (Core activities). With cloud-based accounting software, it is now easy for accounting firms to provide bookkeeping, accounts payable and invoicing services performed remotely. Many of the best run PCOs don’t want to deal with non-core competencies and would rather outsource. From a pricing and quality prospective we’ve seen that the outsourced CFO / bookkeeping model is very efficient.
Business Consulting / Coaching / Strategic Guidance:
Presently we have many tools at our disposal to dissect and analyze our businesses – More so than ever before. However, that means that we need to have expertise in non – pest control related activities. These activities include data compilation, presentation, interpretation and analysis. It may seem a little overwhelming to compete where we need such an abundance of skill sets. What we see the best run firms doing is reaching out to business coaches, consultants as well as participating in industry peer groups. Trying to be an expert in everything as your firm grows may prove to be overwhelming but working with consultants and participating in peer groups allows you to understand what it takes to grow and removes some of the burden of having to know everything.
2020 looks to be a good year for the economy as well as business conditions. With the many business tools at your disposal, there is no better time to grow a profitable operation that provides you with a great living and long-term security. Organizing your business, watching your gross margins and using the technology of the future will provide a lucrative path.