Step 1

Obtain a business performance review.

This is very important. Stepping back and looking at your business and your industry from a broader view can help you and your CPA determine what kinds of strategic opportunities exist.

A performance review includes trend analysis of key components of your business. Discover key topics that may need to be discussed right away and get a feel for your overall financial status.

 

 
Analysis includes several different tools and should be presented in an easy-to-understand format with text, bar graphs, tables and other formats to help you understand what is going on in your business from a 20,000-foot viewpoint. 

Whether analyzing team productivity, operational efficiencies, liquidity, profitability, cash flow, customer profitability analysis or product/service profitability analysis, a big-picture approach can be obtained by analyzing the trends associated with these issues.
 

As CPAs, we are often asked, “What happened to my profit?”. “How can I owe taxes if I do not have any money”. We hear, “Am I OK?”. The answers to these questions should not be a simple one-liner. They should involve a good bit of thought, discussion and analysis. For example, an analysis similar to this may be necessary:

 

The key to a business performance review is to generate meaningful discussion and produce a good understanding of what is going on in the business. This step often times creates some discoveries that can be implemented right away for a positive impact

 

Step 2

Assess your business’s true profit improvement potential.

Seek points in your business that can be leveraged for larger return and cash flow improvement. As each item is adjusted for a favorable outcome, your profit improvement potential should change along with it. For example, a small change to average transaction/invoice value may have a large impact on profit – in either direction. Find out how these small changes could impact your business.

Your CPA should use an analysis tool (like Excel) to determine how even small changes could have a very positive effect.

Calculating your profit improvement potential is just the beginning of the process.
Our experience with business clients indicates that financial performance always improves when clear targets are set and strategic plans are laid out. Prepare 1-year to 5-year projections, setting realistic, worthwhile targets that everyone in the organization can strive to reach.

Working through different scenarios, based on different pricing models, multiple cost structure assumptions and balance sheet considerations like average collections of receivables and average days inventory is on hand, you should pick the most favorable, realistic scenario.

Now, you should have a good understanding of where your business is and where you want to go. Your CPA also understands the issues and where you are heading.

Advice is much more effective when everyone understands the goal and what it’s going to take to get there. For example, what systems need to be in place and operating effectively to insure predictable results? And, which systems and key indicators need to be measured on a constant basis?

Step 3

Ongoing business monitoring is a crucial step because it allows you to see progress and problem areas right away. Timely and meaningful data should be at your fingertips.

Your CPA should have access to a dashboard-style analysis tool to help you see ongoing actual results vs. targets previously set.

It’s an old saying. “What you can measure, you can manage”. And it follows, “what gets managed, gets done”.

Along that same line of thinking, a discovery was made in the early 20th century related to measurement and productivity. Take a look at the Hawthorne effect, defined in Wikipedia as follows:

“The Hawthorne effect is a form of reactivity whereby subjects improve an aspect of their behavior being experimentally measured simply in response to the fact that they are being studied, not in response to any particular experimental manipulation.

The term was coined in 1955 by Henry A. Landsberger when analyzing older experiments from 1924-1932 at the Hawthorne Works (a Western Electric manufacturing facility outside Chicago). Hawthorne Works had commissioned a study to see if its workers would become more productive in higher or lower levels of light.

The workers' productivity seemed to improve when changes were made and slumped when the study was concluded. It was suggested that the productivity gain was due to the motivational effect of the interest being shown in them”.

It stands to reason that targets need to be set. Managers of businesses know that if “you aim at nothing, you may just hit it”. With everyone looking to achieve the same results, the probability of achieving those results is usually dramatically improved. It follows that you must constantly know where you are in relation to that journey so that you can stay on track, similar to an airline pilot flying from Point A to Point B.

 

Summarizing the 3-Step Process

In business, we often find that some of the most basic elements of business are lacking, especially in the area of finance. These fundamentals often get lost in the shuffle or put on the back burner due to the many facets of business that seem to be urgent and “more important”.

In summary, here’s a 3-step process that can help you achieve great things with your business:

1. Start with a business performance review by taking a look at your business’s trends and determine the state of your business.

2. Assess your business’s profit improvement potential and together with your CPA, develop realistic, worthwhile targets.

3. Begin ongoing business monitoring so that proper actions are taken and favorable results are achieved.

We have found that clients want information quickly. With the use of hand-held devices, internet access and other developments in information technology, meaningful data should be available relatively quick. Web-based technology such as “GoTo Meeting” and other platforms allow you to meet with your CPA from your monitor – scanning over results in an efficient manner for everyone involved.

But, at times, either quarterly or semi-annually, we recommend getting together with your CPA to update projections and to discuss what’s going on in more detail.

Good luck.