6 Steps to Financial Freedom for Businesses – Step 4September 21, 2023
Develop Simple Sales and Accounting Systems
In Step 4, we’ll talk about developing simple systems to measure your finance and accounting and your sales performance. Simple systems.
People massively overcomplicate financial accounting. You don’t have to be a CPA. I’m not a CPA. I have a CPA, and I have a bookkeeper, and I can read a financial statement, a P&L balance sheet.
But people think they have to be a financial expert. They get so overwhelmed they just roll the dice and hope it all works out. And that is the kiss of death for small businesses. If you aren’t looking at your financials at least a couple of times a month, measuring everything that’s going on, and knowing exactly where you need to be, you are flying in the dark. You’re driving down the highway at midnight, pitch dark, headlights off, and you don’t know what’s coming at you.
You have to have simple sales and accounting systems to measure the performance. I’m not talking about complicated software or apps that you need a dedicated IT team to run and support. I’m not talking about needing to go to school for years to figure out this stuff.
We’ll just touch the surface here today, but let’s start with a simple accounting system.
There are a hundred accounting terms, but even if you don’t know the terms, you do need to know how much money is coming in (revenue) and how much money is going out (expenses) in order for you to sustain your business in the long term. For example, if you don’t know what your gross profit is, you’re headed for trouble. And every industry has certain key performance indicators (KPIs). You should know what those are for your industry. One of the expenses is Cost of Goods Sold.
Cost of goods sold (COGS) can be defined as the expenses needed for you to produce and sell a product.
What does that mean? Well, the product needs to be made somewhere. That means there is the overhead cost of leasing or buying the building where it’s made. The portion of the building used for making the product falls under manufacturing overhead. (You will have additional overhead not included here, because it pertains to the rental cost of the portion of the building not directly used for making or storing the product.)
The product needs to make it to the consumers’ eyes. So this means there is a cost involved in marketing and selling the product. And that can also include the labor/salary paid to the marketing team and the sales team for selling that product. This cumulative number (COGS) will be subtracted from your sales totals to arrive at your gross profit.
Again, you don’t need to be Einstein to keep your books, but there are a handful of numbers that need attention. If you know your gross profit and it’s lower than you want it to be, you’ll need to make adjustments. That comes in the form of lowering your COGS. You can raise prices on your goods, find a more affordable place to make your product or purchase cheaper parts, or even reduce staff or look for other waste and inefficiency. At first, it may be trial and error until you know your industry better and your personnel better.
If you have costs that aren’t directly related to the production of goods, they’re called Operating Expenses (OPEX). These are things like insurance, office supplies, payroll, and the portion of rent not used for manufacturing your product.
When it comes to growing into a larger company, it comes at the cost of detailing each line of expense and revenue more clearly. Accounting can become more granular, and large companies have to follow GAAP (Generally Accepted Accounting Principals), whereas smaller companies do not.
Large companies use metrics measured in sets and subsets. Because the larger a company becomes, the greater the effect of a particular inefficiency, for example. If your data tells you sales are down 50% on Sundays in all your markets, it can mean each store in your chain is affected, and one improvement or correction may really help your bottom line. You may discover your product is more male-oriented, and Sundays are usually football days, with fewer men shopping that day. Whatever the reason, the data may help save the day because it’s become more detailed, knowing more is on the line.
My point is that you have to know the basics even if you’re not an Accountant. You have to have departmentalized accounting. Every department has to be organized. Many times, I’ll go into a company and will connect with their internal Finance/Accounting department. We find out what the Service Department is doing in terms of tracking and measuring. We check on the Operations numbers. Are different products outselling others, and why?
And then you have to know your Sales performance numbers. What is the benchmark? In my industry, for example, revenue per lead is the benchmark. And when I have a salesperson go out on a sales call, we’re looking for $5,000 average revenue per lead. That means on every lead, if I give a person 10 leads, I expect him to bring back $50,000 in business. If you don’t know that number for your business, if you don’t know that number for your industry, how will you know if you’re doing a good job?
How do you know if you’re making progress or what the ceiling is? How do you know if you’re moving forward or backward?
When it comes to solving problems with sales numbers, companies miss out on the opportunity to retry the leads they weren’t able to sell the first time around. They mainly focus on the close rate, meaning the ones they did sell. The lost rate and the rehash rate are KPIs that are often overlooked. To maximize their sales, companies should not ignore these. Unfortunately, not many companies measure the lost rate and the rehash rate, so we developed the app “Rehash Leads” to help automate the rehash process.
Regardless, the idea is to set up simple systems at the birth of your company and then grow it as needed to include more detailed accounting, better sales troubleshooting, and a better overall understanding of your industry. Like with anything, the more experience you gain at this, the more successful you’ll set yourself up to be in the near future.
The next time we talk, we’ll cover Step 5. Have a great week.