Why Do You Need Key Performance Indicators?

Key performance indicators are one of the hallmarks of good business management. Performance indicators provide an analysis of the overall business operations of a company, which can be used to make decisions about finance, employee training, resource deployment, and many other facets of the business. Although universal indicators do exist, business owners will benefit more from having information about their individual companies.

Goals related to sales, production, resources, and more are clearer and more measurable when companies use key performance indicators. Over time, performance indicators create a historical record of business operations, so that it is easy to make comparisons year-to-year or quarter-to-quarter.

Performance indicators can serve as an external benchmark that allows for the comparison between a company and the industry standard. It can be difficult to measure the performance of a small business to that of a larger operation, but performance indicators let business owners look at smaller, more comparable data sets.

Using performance indicators to set company policies can help make sure that all employees follow the same operating standards. Policies related to customer service can benefit from the use of customer service performance indicators, and operational managers may find performance indicators useful in reviewing employee performance.

Key performance indicators usually track money spent on business operations and the return from business opportunities. Implementing performance indicators that specifically track cost cutting measures or increasing sales can enhance profitability by allowing for small operational changes that have a big impact based on what the performance indicators show.

Tips for Developing Individualized Key Performance Indicators

Set your goals. 

Without clear goals, performance indicators cannot measure progress because no one knows what they are progressing toward. Specific, clear goals for each area of the company from safety to sales to employee performance.

Attach numbers to each goal. 

Giving concrete value to each goal provides specificity and gives the company clear, measurable objectives.  How many new customers  are necessary? How many safety violations must be avoided? How much money needs to be saved through cost cutting measures? “Increase profitability” is a vague goal; add $1 million in new sales is clear and measurable.

Track progress that has already occurred.

 When key performance indicators are paired with specific company activities, it becomes easier to develop indicators that will measure progress toward future goals.

Take a close look at the current numbers.

Analyze the numbers in each area of review and determine the percentage of change that has occurred. Examining current numbers will help in developing effective goals for the future.

Decide how often the indicators will be reviewed.

Key performance indicators should be reviewed at set dates throughout the year; different areas will require different frequencies. For example, financial indicators may be reviewed monthly, but employee review indicators may only be reviewed annually.

How Small Businesses Can Leverage Cloud Computing

Cloud computing is redefining how businesses run, impacting the operations of large enterprises as well as start-ups.  For some the notion of “cloud computing” is a relative new concept. 

Cloud computing provides businesses with access to the valued end result or output of equipment and   Most often, cloud computing is delivered as software as a service (SaaS) where users can access a web based solution via a subscription without the heavy investment in the IT infrastructure to support it.  Recent growth in cloud computing is partly driven by the growth in mobile technology platforms that allow users to access information anywhere, anytime.

software, without the ownership or maintenance costs required by purchasing it.

Although large enterprises with multiple geographically dispersed offices have benefitted from cloud computing, it has been an even greater benefit to small business.  Small businesses now have access to enterprise solutions via the cloud computing that would otherwise be unaffordable for them.  Even more importantly, these cloud based solutions allow small business to function more like larger business in the information they can access while simultaneously maintaining the flexibility and agility of a small business, allowing them to react and adapt to situations. 

Some of the benefits cloud computing provides for small businesses include:

• No heavy investment or maintenance costs in IT.  The software as a service method allows multiple users to subscribe to the solution.  The vendor providing the solution- Intaact, NetSuite, etc., absorbs the maintenance costs, and by offering the service on a subscription basis can pass along cost savings due to economies of scale attributable to user volume.
• Ease of implementation. Cloud based solutions eliminate the need for small businesses to invest in infrastructure development, training, and support. Businesses subscribe to the service, and training and support are provided by the vendor on an as needed basis.  The business owner can subscribe and unsubscribe to the cloud service as they wish.
• Redeployment of IT.  For small business with limited manpower, cloud based services free up time for IT resources to be redeployed on more strategic initiatives or reduce the need for full time IT employees.
• Security. Business owners should always check this, but reputable cloud based solutions are knowledgeable about the most up-to-date security measures and encryption technology.  This becomes one critical task which the business owner does not need to address, as the responsibility is absorbed by the cloud service provider who may have more expertise in this arena. 
• Scalability.  Most cloud providers offer packages with different access levels so that small businesses only need to pay for the services they require and use, resulting in overall cost savings for the small business.
• Business Continuity/Disaster Recovery.  As a small business, this is a critical task which can often lack the attention it deserves simply due to manpower and bandwidth.  Cloud based services assist with this, as they back-up critical data offsite as part of providing the solution, facilitating access to this data in case of an emergency.

Small to mid-sized businesses have the most to gain from leveraging cloud based solutions in their business operations.  If you would like to learn more on how Alan Neal & Associates can assist you with selecting and implementing an appropriate cloud based solution for your business, please call me directly at 423-756-4076 or email me at alan@alanneal.com

CPA Meeting Checklist

People dread meeting with their CPA for many reasons, not the least of which is gathering the paperwork necessary for a productive, useful meeting. Here is a quick list of common documents to help you prepare for a meeting with your accountant:

Income Records - Invoices, Bank Statements, and Investment Accounts Your CPA will need all of your receipts, invoices, bank statements and investments. A form 1099-INT, which reflects your savings and interest is also necessary. Performing regular and timely reconciliations of bank statements and having a system for keeping income records easily accessible is helpful.

Schedule K-1 - If your business is classified as a partnership or corporation, you will also need to report any income or loss on a Schedule K-1. This form details individual shares of income within a partnership or corporation.

Expenses - Miscellaneous office expenses could range from supplies to travel, depending on your situation.

Mileage Miles - driven for business purposes can be claimed as a deduction. Save receipts for tolls incurred while driving for business, too!

Payroll - Documentation of employees’ salaries and wages, Forms W-2, W-3, and various forms required by the state will also need to be updated. Up to 20 Form W-2s can be created and printed on the Social Security website. Learn more athttp://www.ssa.gov/bso/bsowelcome.htm. The earnings of people who are hired for specific expertise must be reported separately on a form such as a 1099-MISC. If you are providing retirement plans for your employees, you can claim certain deductions.

Mortgage Interest - If your business operates out of your home you can deduct some mortgage interest, insurance, and some maintenance expenses -- but you must have documentation supporting all of those expenses. People who are self-employed may need to use Form 8829 to claim these deductions.

Office Rent - Expenses related to rental taxes and some utilities may be claimed if your office premises are rented.

Interest - Money that is borrowed for business activities can be deductible, if you have valid documentation showing how it was used.

Insurance - Policies for business coverage may be reported as a tax advantage -- if you have the proper documentation.

How To Effectively Plan for the New Year

Establishing business goals early in the year is critical for businesses because goals set the course for the upcoming months. Planning is far more effective when informed by the past. Using some simple guidelines as you map out your company’s year will help you stay on track when unexpected events and nagging details threaten your progress toward your goals.

Think Long Term Considering where you want your company to be in one, three, and five years as you plan for the upcoming year will give you a global setting for your goals. Just as it makes sense to break large tasks into smaller ones, it is also effective to break your long term goals down into short term goals.

Think Short Term Your short term goals, whether monthly, quarterly, or annually, should act as reference points along the way toward realizing your long term goals. Having short term goals will provide your company with a clear path to longer term goals.

Make Your Clients or Customers Part of the Process Your customers are the most important source of information about your financial future. You probably don’t want to invite them to your planning meetings, but you should certainly consider the information they provide. In addition to using your sales numbers in the planning process, you may want to use surveys and questionnaires to learn more about what your customers prefer.

Ask Your Employees Management does not always have the same kind of contact with customers as other employees do. Including employees from every level of your organization in the planning process may reveal facets of the day-to-day operation of your company that you hadn’t considered. Additionally, when employees have a clear idea of the organization’s overall goals, they more clearly understand how their positions contribute to reaching those goals.
Track Your Progress Assessing progress at regular intervals helps in realizing goals. Regular assessment shows clearly whether a company is progressing toward its goals or has gotten off track. Regular assessment also provides motivation for your team as well as allows you to recalibrate as necessary.

Four Business Functions To Automate

Four Business Functions to Automate
Most small to mid-sized businesses operate under restricted budgets and must optimize existing resources to remain within budget, while ensuring that client services and client expectations are met. 

Automation can assist small businesses in optimizing existing resources. Identifying key areas to automate can produce significant increase in productivity. Below are four business functions worth considering for automation. 

Bookkeeping is the foundation for accounting. When a company automates bookkeeping functions, record keeping is completed in a timely and accurate manner. 

Accounting functions are the backbone of every business, including start-ups. Accounting requires maximum attention to details. A minor error that occurs when recording financial transactions can result in under or over reporting of profits, or worse--significant tax implications. For many small businesses, the owners are responsible for the accounting and also providing the services to clients. Business owners can perform a finite number of tasks and do them well. They can either work diligently to ensure client services are met, thereby neglecting the accounting tasks, or they can pull resources from client services to concentrate on the financials. Automating the accounting function can assist in ensuring both objectives are met. 

IT Processes: Small businesses depend on IT for speed and efficiency in servicing clients. Automating IT processes can assist in ensuring better record-keeping and adherence to deadlines through a system of automated triggers, email-reminders, etc. 

Training and Communication: In the case of small businesses where employees may work remotely or in various geographic locations, business owners can create frameworks which serve as information and training portals, thus reducing time and expenses involved in live training and knowledge transfers. 

The Importance of Benchmarking

Benchmarking is used by many business owners to assess the health of their businesses. An industry benchmark is typically a range of financial performance metrics in key areas, compiled by averaging data from a group of comparable businesses. These benchmarks provide a reference point for business owners to gauge the areas of financial success and measure progress against established goals.

When evaluating benchmarks to assess financial successes and progress the following should be considered:

Compatibility of data - When selecting comparable companies, the businesses selected should have many similar characteristics. For example, the comparable companies should be similar in size, offer similar products and/or services, have a similar corporate structure, and an equitable number of employees. Comparing a company with 500 employees to one that has 25 will not be a good comparison--even if they offered identical services.

Time period of data - It is imperative to understand the time frame of data comprising an established benchmark when comparing a business’ financial performance to that benchmark.  For example If you have a retail store and you want to compare it against other retail stores that are similar in size, product, and corporate structure and the data from the benchmark  was compiled for the period  January 1 2008 through December 31, 2008 and the data collected for the retail store is January 1 2012 thru  December 31,2012, the bench mark may be faulty because economic conditions may have changed substantially.

Calculation methodology - When developing benchmarks, it is important to know how the comparative businesses arrived at the calculations so that the financials are a true comparison.

Key metric comparisons - There are several ratios that businesses use to assess financial performance which can be useful to benchmark. These include

• profit margin - measure of profitability 
• current ratio - measure of liquidity, current assets/current liabilities 
• quick ratio -measures immediate cash liquidity, cash, plus accounts receivable/liabilities 
• debt/equity - measures how well a company is leveraging its debt 

Financial benchmarking is a valuable tool for small to mid-sized businesses in assessing how they compare with their peers. Alan Neal & Associates is currently offering a free analysis of your business processes and accounting system. If you would like to learn more on how we can assist with your business processes, including benchmarking, please call me at 423-756-4076 or email me at alan@alanneal.com. 

Evaluating the Efficiency of Your Accounts Receivable Processes

You can ensure your company's accounts receivable processes remain efficient by reviewing the performance of the collection processes and key metrics associated with them. Below are some suggested metrics that you may consider integrating into your financial analyses in order to determine whether you are using optimal accounts receivable processes. 

Receivable Turnover Ratio - This is your credit sales divided by average accounts receivable.  This measures the number of times trade receivables turnover during the year, and is an indicator of how efficiently your company is collecting credit sales. Maintaining a sound accounts receivable practice and a strong credit policy help maintain the liquidity of your business. The higher the turnover of receivables, the shorter the time between credit sales and cash collected on those sales. 

Days Sales Outstanding - This measures the average time in days that receivables are outstanding or uncollected. Generally, the greater the number of days outstanding, the greater the probability of delinquencies in accounts receivables. The longer your credit sales remain uncollected increases the probability of the inability to collect those receivables. 

Accounts Receivable Follow-up - The increase of two or three days in sales outstanding can have a significant negative impact on the liquidity of a small to mid-sized business. Consider creating an account collection procedure that provides the actions and methods for processing late or delinquent payments. The account collection process should commence as soon as the account becomes past due. These functions and reminders should be automated wherever possible. 

Consider evaluating your accounts receivable processes based on these metrics and practices to improve the collection process of your credit sales. 

 

Tips for Effective Budgeting

Budgeting is essential to every company regardless of size.  An effective budget helps with planning and is essential for reaching objectives and goals while preparing for difficult or unexpected financial situations. Here are 5 tips for creating an effective budget:

·       Budget should be for a specified period- The budget most often is based on the company’s fiscal year and broken down into monthly budgets. When creating the budget, consider the timing when both income and expenses will occur. 

·       Don’t try to budget to the penny-  Accurately predicting actual results is not the objective, it's about providing your company guidance for coarse direction.

·       Forecast your income and expenses- Review your current and historical financial data and project your income and expenses for a specified timeframe.  Income should include payments received from sales, interest, accounts receivable and other sources. For expenses, all expenditures should be included, such as payroll, materials, note payables, utilities and any other expenditure. 

·       Run budget comparison reports- This is often referred to as a “variance report." Comparing your budget with actual amounts earned or the expenses you incur will enable you to determine the corrections needed to grow your business.

·       Create profit and cash flow targets- Every budget should include profits and cash flow targets, because they are both bottom line measures that require different functions to control and manage them. Every year companies with very attractive profits go out of business for lack of cash.

Follow these five budgeting tips to create an effective budget for your business. Use your budget as a guide, and make corrections as needed to stay the course. 

Please tell us what you need to know! We welcome all suggestions for articles, interviews, or whatever else you might like to see in the next issue of Financial Matters. 

Forecasting vs. Budgeting for Small Business

Running a business presents many challenges, and there are financial practices available to assist in the planning and management of your company’s financial future. The use of financial forecasts and budgets 

 

can help you determine where your company is headed and how you can achieve your financial objectives and goals. People often use the terms "financial forecast" and "budget" interchangeably, but each provides distinct and essential functions. It is important to determine the functions of each in order to apply them effectively.

Forecasts - Make predictions or projections of expected revenue and expenses based on historical data, managerial expectation and foresight, and other factors into an uncertain future. A financial forecast seeks to predict a company’s financial position, cash flows, sales, expenses and other figures in the future. Forecasts are more flexible and will change as your company’s financial position and market factors change.

Budgets - A budget is a detailed financial plan consisting of a defined set of financial objectives that guide thedecision making processes and seeks to exercise control over the company finances and resources while guiding the company to where it needs to be. The objective is to insure that the company does not spend more than they are making in sales revenue. Often, adjustments must be made and are reflected in a “variance report." This report shows the budgeted amount compared to the actual amount realized. Budgets allocate money for specific purposes and are the objectives and goals set for the company.

Forecasting and budgeting are both financial practices that assist in preparing for a company’s financial future.  Typically budgets are prepared yearly, while forecast are prepared more frequently, usually monthly. Forecasts tend to change based on financial and market conditions, while budgets are more concrete.

It is essential for small and mid-sized companies to be aware of their finances at all times because one small operating error could spell disaster. That’s why it is critical for small and mid-sized company owners’ to forecast and budget. Knowing how much to spend and on what is the most important thing for a small business to stay solvent.

We are currently offering a free analysis of your forecasting and budgeting process. If you would like to learn more on how Alan Neal & Associates can help move your company forward, please call me at 423-756-4076 or email me at alan@alanneal.com
Alan Neal  CBA, CM&AA

Why Outsource?

Following are just a few reasons to consider outsourcing to meet your accounting needs: 

Reduce Overhead

• in-house accounting departments are expensive!
• avoid paying for space, equipment, employee benefits, etc.

More Time for Core Business Operations

• no hiring or training required for the accounting department
• no need to monitor 
• spend more time generating income! 

Accuracy

• financial data is entered by professionals
• accuracy is double-checked
• data can be accessed anytime, from anywhere

Access to Highly Trained Professionals

• work is performed by the appropriate professional
• your bookkeeper doesn't have to be CFO and controller and bookkeeper
• current employees can be better utilized

5 Tips for Forecasting & Maintaining Cash Flow

1. Calculate your break-even analysis. The budget process begins with a break-even analysis, the equation that shows a business' base cost to provide its product or service. Due to the uncertainty of revenue, businesses must keep fixed cost to a minimum, and manage the variable cost closely. Most business owners are preoccupied with covering daily expenses and making payroll, and fail to perform this analysis, exposing their businesses to undue risk. 

2. Re-evaluate fixed expenses. The fixed expenses normally represent the largest expenditures from a company's cash flow. As a business owner, you should second-guess your fixed expenses to see where savings may exist. Be certain the fixed costs are commiserate with revenue levels, and scrutinize all variable costs to death. 

3. Review financial status monthly for tax purposes. Review your financial statements monthly in order to know the tax liability incurred and include this liability into the cash flow forecasting schedule. 

4. Know your business and know your customers. Knowing your customers' payment habits is the key to producing a good cash flow forecast. When forecasting the in-flow and out-flow of cash, things rarely - if ever - go exactly as you plan. But, the better you know your business and your customers, the more accurate your forecast will be. 

5. Evaluate variable costs at least every six months. You should regularly evaluate or audit variable expenses, such as office supplies, for necessity. 

Components of an Effective and Efficient Cash Management System

In any business, as the saying goes, "cash is king," but it's especially true for small and mid-sized businesses where minor fluctuations in cash flow can have a tremendous impact - either positive or negative. Even so, many companies do not have a formalized cash management system. Many business owners tend to concentrate on earnings, rather than cash flow. Companies don't file bankruptcy because they incur an accounting loss; they bankrupt because they do not have the cash to pay their obligations. 

Optimizing cash flow management is one of the most important tasks in achieving overall financial health. Efficient cash management goes beyond economic or financial planning. In order to convert your budgets and plans into cash forecast, you need a timeframe for transactions that generate income as well as those that relate to expenses.

An effectively administered and efficient cash management system will consist of:

Cash Flow Forecast - To effectively manage cash flow, you must be able to accurately forecast when you will receive cash and when cash must be paid out. The cash flow forecast covering a fiscal year should be based on the company's budget and adjusted for the timing of actual receipts and disbursements of cash for each line item of the budget. Using an accurate and detailed cash flow forecast, along with a detailed operating budget, enables businesses to evaluate future cash requirements, ensures that liabilities can be paid on time, and that capital can be secured to avoid a cash flow crisis. Optimally, businesses need to forecast daily, weekly, monthly, and annually, and compare the forecast against actual results and modify the budget and forecast when warranted.

Banking Relationships - The relationship between business owner and banker needs to be one of trust and partnership. The key is excellent communication. You need your banker on your side, and to make that happen, he needs to understand what you are doing and be confident in your expectations for the future. Your banker expects you to know much more about your business than he knows, and you need to keep him informed about your business and what you expect to happen in the future. The better you can project and forecast, the more confidence your banker will have in you, and the borrowing process will be smoother when the need arises. 

Line of Credit Access - Shortfalls in cash can be devastating to businesses, and depending on the extent of the shortfall, recovering can be difficult. Establishing a line of credit as part of your contingency plan offers benefits. In some cases a line of credit is the best solution to maintain liquidity. 

Investment Of Surplus Cash Program - Using your cash flow forecast and your detailed budget together ensures the availability of funds to pay liabilities and allows you to see the timing of surplus cash. Rather than allowing the bank to sweep the account, the surplus cash can be invested in higher yielding, safe investments. You can choose these investments based on the availability of the cash before it is needed to fund operations. Higher yielding investments will increase interest income and free cash flow, enhancing company profits and value. 

Why Bother Outsourcing Your Accounting Function?

Automation has made accounting and bookkeeping easier. However, problems of carrying out a job right still remain. Outsourcing your accounting function makes immense sense, especially when your business is an entrepreneurship or a small business. If you're a business owner yourself, you would probably not understand nuances of accounting and bookkeeping unless you're trained. Further, there are other aspects to outsourcing accounting.

Business first
Save your time and energy and effort for your business. Outsourcing the rest of the administrative work, including your accounting, makes immense sense. Remember, your accounting will form the financial backbone for your business.

Do not neglect your customers
If you're not a trained bookkeeping or accounting professional and you are depending on self learning and instinct, you may succeed, but at a price. You may have to spend time away from your customers and instead, ensure on accurate accounting. Instead, outsourcing your accounting will help you serve your clients' needs better.

Discovering last minute errors
This could be a nightmare that can be avoided completely. An accounting and bookkeeping professional will know best about paperwork that needs to be completed, especially for IRS and taxation purposes. Even the best of your intentions may not help your business if your paperwork falls short on requirements. Outsourcing your accounting needs to a trusted vendor can save you precious time and money in penalties.

Meet your deadlines
The last thing you want to do is work around clashing deadlines. Your client requirements are piling up, work is suffering, but you're busy with bookkeeping and accounting because you really don't have much choice. To add to the chaos, you discover that some key entries are missing from your books and you may have to spend additional time looking for the relevant paperwork before you can make those entries. Outsourcing you bookkeeping and accounting can help you avoid these problems.