The word on the street

25/10/07

Approach your business like a banker

If Welsh businesses ditched traditional accounting practises in favour of a more direct banker’s analysis, they will not only be focussing on the numbers that really matter in their business, but also be able to make better, more strategic decisions says Nick Setchell, Vistage International (UK).

In today’s society even the most basic items comes packaged with masses of information. If you buy a mobile phone, for example, the booklet accompanying the phone often weighs more than the phone itself.

Similarly when running a business, the amount of knowledge and know-how executives, managing directors and CEOs are expected to have mastered and be able to filter through to make effective decisions is incredible.

It is not surprisingly that most managing directors and CEOs, who are expected to have an oversight of the vision and strategy, demonstrate strong leadership and motivation and understand the operations, do not have a strong financial background.

However, by adopting a relatively simple financial framework which bankers use when evaluating your business, business leaders will be able to get to the heart of what it is they need to look at in order to understand the business quickly and therefore take the necessary decisions to make it more effective.

Importantly, this means pushing aside traditional accounting and your accountant in some respects if it is to have real impact within the business.

The reason is simple – double entry bookkeeping i.e. profit and loss statements and balance sheets does not give you an easy-to-interpret representation of what is really going on the business.

Moreover, the amount of revenue your business generates is not necessarily the best indicator of how your business is doing.

Quite often this results in companies coming unglued and, if not dealt with quickly and correctly, can lead to their ultimate downfall.

Instead those in charge of the business – after all it is a vital operational issue – should focus on a number of key fiscal elements if they want to turn their investments into positive returns.

Firstly, it must be understood that the data captured via traditional accounting methods are designed to meet statutory regulations, not to tell you what is happening on the operational side of your business.

This means that in order to make it more realistic, the data needs to be represented and interpreted in a different way.

Similarly, we need to reassess how we view input i.e. that which you invest in your business relative to outputs such as profit, increased production, etc. and how that cycle is managed.

When looking at output for example, the data is traditionally encapsulated in the profit and loss statement.

In order to make this data more realistic, we need to include how the owners remunerate themselves and how this number is reflected in the analysis, be able to separate the operational costs from funding costs and ensure that both direct and indirect costs are captured consistently.

By identifying the right numbers to include, we can then go on to ask the right questions such as how appropriate our pricing philosophy is. This is a rather fundamental question which many executives shy away from by putting the blame on the market.

Other questions include comparing your profitability to others in the same industry and importantly how we are balancing profit and loss J-curves.

Naturally there are a number of other areas executives need to look at in order to complete the fiscal focus framework, but this should be a good place to start.

After all, by identifying the right drivers in your business, i.e. the numbers that really matter, executives will be able to target and address not only the relative strengths and weaknesses within the organisation, but enable themselves to take those decisions that will have the biggest impact on turning inputs into positive outputs and quite possibly take their turnover through the roof.

Moreover, it also puts business leaders where they belong, in the driving seat, determining the future and the road we need to travel to get us there.

Further information contact, M & M Communications on 079 5869 0659 or buzz@mandmcomms.com