Business By The Numbers; Simple Questions a Shop Owner Can Ask Regularly to Stay in Control

If your typical day is a series of disruptions and interruptions like that of many small business owners, then you may find yourself having difficulty controlling your business and knowing with certainty where you stand on a day to day basis. All businesses face challenges. Those challenges are most easily met if focused on early. What starts out as a minor inconvenience can become a survival issue if not identified and managed in a timely way.

But the disruptions and interruptions aren’t going to go away. So any system for anticipating problems and controlling your business has to be simple to develop, simple to use, and take not much time. It has to be your servant; not make you a slave to data collection. Here are some ideas on developing one that’s right for your business.
 
The first thing you need is a budget. To some people, this means a complex financial model on a computer projecting a balance sheet, income statement and cash flow. If that’s what you’ve got, great. But in the interest of keeping this simple, let’s assume you at least have a sharp pencil and some accounting paper with columns.
 
Write the 12 months of the year across the tops of the columns. Let’s start with the current month. Down the left side of the paper, enter the following row captions; sales, cost of goods sold, and gross profit.
 
Continue with the following expense categories; advertising, promotion, salaries and taxes, rent, telephone, utilities, maybe interest expense, and supplies. Finish up with pretax income for the month.
 
Now say, “I’m the only one who really understands my business” and change the categories to reflect the specifics of your shop. Maybe it would be helpful to split up sales among product type (boards, boots, bindings to use one example that comes to mind). Could be that the costs of keeping the doors open every month always total nearly the same and you’re comfortable with just one total number for these costs. Whatever works for you.
Now fill it in. Congratulations! You’ve got a budget If it took you more than an hour or two to do this in rough form, then you may have identified the first minor inconvenience that could become a survival issue; poor financial data.
Get yourself a manila folder, label it “My Control System,” and put the budget in it. You’re half way there. Now all you’ve got to do is ask a few simple questions on a regular basis and record the answers. The questions I recommend are:
 
1)    How much did we sell today? Get another piece of accounting paper, write the month on top, and the days from 1 to 31 along the left margin. Have two columns headed “Today’s Sales” and “Cumulative Sales.”   Fill in the two columns at the end of each day and put it in the folder.
2)    How much did we sell this week? Add a column to the daily sales sheet and put a weekly column every seven days. If you think it would be valuable, add another sheet of paper and look at sales by major product group weekly. At the very least, do that monthly.
3)    What’s the gross profit? Look at it weekly and at the end of the month in total dollars and record the information on another sheet of accounting paper. If you know your starting inventory, what you have received, what it cost and what you’ve sold, this is a simple calculation.
4)    How much inventory do I have? Record it weekly and at month end on another piece of accounting paper you slip into your folder. If you answered question three above, you’ve already got the answer to this one so the only additional work is writing the numbers down. A refinement you may want to consider is looking at your inventory by major product groups.
 
Now we’re getting somewhere. We have a simple budget, are tracking sales, gross profit and inventory levels. We can start to make some decisions. Trends can be spotted early and adjustments made with minimal pain. The magic of this is that the more you do it, the better those decisions will become.
 
Are inventory levels too high or too low given your sales levels? What should you try and see if you can get more of, and what should go on sale or be displayed differently? Your gross profit is higher than expected. Is sales of one brand with a particularly good margin outpacing other brands? Is this a chance to dump some stuff that’s not moving and still maintain your profitability?
Obviously, all these factors work together in a very dynamic way. With the kind of system I am describing here, you’ve got them all in front of you in a very simple format. Patterns will emerge and trends be more obvious. You don’t have to be a master of accounting to do this.
 
In fact, remember that this isn’t accounting at all; it’s management. You do not need precise numbers. I am not suggesting a physical inventory every week. Don’t count your nuts and bolts. Focus on the products that make up most of your sales.
 
Let’s move on to the expense side.
5)    What are my fixed monthly expenses? There’s a bundle of monthly operating expenses including things like rent, telephone and insurance that should stay pretty constant from month to month. Look at them monthly and don’t expect much variation. If you see it, ask why.
6)    What am I spending on salaries (including taxes and benefits)? Salaries should be reviewed weekly and at the end of the month. Weekly because they are a big expense item and can be managed relatively easily in response to changes in sales. Add another piece of accounting paper to your folder that by now has all of, oh, maybe five pieces of paper in it.
7)    What are my advertising and promotional expenses? Record them weekly or monthly depending on what right for your business. Use the same sheet of paper you use for salaries. Let’s keep this folder thin. In fact, put all your expenses on one piece of paper.
8)    How’s my cash flow? That’s probably another article, though by asking the seven questions I’ve listed above, you’re well on your way to predicting your cash flow. As a retailer, paid at the time of sale, you don’t have the collection of receivables to worry about. Your cash flow typically differs from your income statement in four basic ways. First, some taxes may be paid quarterly, though you expense them for income statement purposes monthly, as incurred.
 
Second, you’ve got terms from some of your suppliers. You recognize cost of goods sold for income statement purposes when the product is sold, but may not be paying for the product until some months later.
 
Third, you’re probably paying for fixtures and leasehold improvements at the time you receive them, but depreciate them over some period of time on your financial statements.
 
Finally, if you’ve got a line of credit from a bank, your borrowings and repayments are not reflected in your budget, though your interest expense is.
 
Shouldn’t be very hard to adjust your income statement budget for these differences and have a cash flow.
 
At the end of the month, look at your budget compared to actual and see how you did. Since you’ve been following things daily and weekly anyway, there shouldn’t be anything unexpected. As a modification, consider adding a column after each month of the original budget for inserting the actual numbers at the end of the month.
 
So here’s a tool for you to consider using. If you’ve already got a good accounting system, this can help you focus on what’s important. If you don’t, this will give you the minimum you need to control your business and anticipate problems and opportunities. This generic system should, of course, be adapted to the particulars of your business. The exact form it takes isn’t as important as using it regularly; every day, week and month. Invest a little time now and you will have more time later, and better control of your business.