The Income Statement certainly gets most business owners’ attention. The connection between your company’s operations and the balance sheet is just as important. Remember, the Balance Sheet shows the value of your business at a point in time. Here it’s not an overall picture that tells the tale, it’s the amount in each individual account that shows the difference between a growing, thriving business, and one that has lost control over its major assets.
Two accounts on the Balance Sheet that hold large value for many companies are Inventory and Accounts Receivable. But it’s not just the size of these accounts that’s important, it’s the measure of control that is exerted on the underlying operations in those areas. Every business owner knows that these are important. If they don’t apply solid business practices to controlling and managing those areas, the resulting business risk results in additional cost to the company.
After selling a significant portion of the company to an ESOP, the long-time owner suddenly had someone looking over his shoulder – the ESOP Trustees. Issues that never concerned him before were brought to the surface, since they affected company value. Bank reporting included a monthly borrowing base, in which Inventory and Accounts Receivable played a significant role in credit line availability. So, increased interest was focused on those two topics.
The company had over $5 million in inventory and had never done an annual physical count. When their bank finally required a physical as part of their borrowing base reporting, a 10% variance was uncovered. That $500,000 hit to the bottom line needed to be corrected to assure that it was never going to happen again. Controls on inventory movement needed to be put in place, and a program of mutual responsibility among the warehouse staff needed to be instituted. Accurate inventory had to be everyone’s goal.
Increasingly, it seems that large retailers find new ways of making the lives of their suppliers difficult. Unusually detailed shipping restrictions, hard to meet packaging considerations, specific instructions on timely shipments. Some of these may be necessary for smooth stock operations at the receiving dock. But often, it seems to be just another way of building revenue on the back of the supplier. Care needs to be taken with each shipment to assure compliance. In the accounting department, chargebacks need to be carefully handled to minimize lost profits.
Company profitability is best set on a solid foundation and built brick by brick. Each error, whether it be in Inventory Control or in Accounts Receivable, eats at profitability one small bite at a time. When they are left uncorrected, net income is reduced on a daily and weekly basis. As time passes, more errors and problems get added to the top of the pile. Finally, it’s impossible to see any of those little, inconsequential errors that have reduced the profits of the company so dramatically.
It’s more than good procedures that help maintain profitability. The work of each individual is key to the success of any company. Employee engagement, which is necessary to fixing any problem in any company, is dependent on their feeling that they are part of the solution. Without that, they are just part of the problem. Consider the many things listed in this newsletter. How many of them would make a difference in your company? Little changes add up to big results.
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