Have you ever heard “where do my money go” question from one of the company’s owner? I dare to bet you had, maybe more than once if you share an office with your boss.
Your boss is not simply asking about how you spend the company cash, clearly. She is questioning how the management (and everybody in the company) use company’s asset.
Such question shows either your boss simply does not really get a clue upon reading the financial statement you present; or he/she got frustrated when looking at negative bottom line on the income statement.
For years I have reviewed budgets, financial statements prepared, and comparing both at the end of each month, quarter and year. Often when I scan these in the presence of a peer or a client, they joke that I use sixth-sense (kind of metaphysic skill) things in catching even a small problem lied behind number on a financial statement.
The truth is I have no specific magic, nor any unusual skill to do that. If anything, I have an accumulation of experience gained from looking at so many of them which is not fancy days at all.
“So, how do you do that?” You may wonder as well.
First, I look for things that stick out like a sort thumb: Is something on the income statement way out of line?
If sales revenue is way up and gross profits are not, for instant, that sticks out! Somewhere along the way, profit margins took some kind of a hit. This is usually caused by increases in costs, reductions in prices, a shift in the mix of what was sold, or to whom it was sold, from higher profit products (services) to lower profit ones.
Next, I dig a bit deeper and look for the root cause. Then look for the answers to these questions:
- Was this caused by a one-time event?
- Is it the start of a trend, and if so, how long will that trend last?
- What can be done to reverse it?
- Can it be reversed and the lost profits recovered?
You can use this same approach if sales revenue is up and gross margins are up a comparable percentage, but operating profit or net profit is not. Then the problem must be in selling, general, and administrative expenses, or some period expense (a variance, and unusual charge), or interest expense (due to elevated inventory, slow collections, lower payables, or a large capital expenditure). All of these will increase working capital and since that is usually borrowed money, interest costs go up with it.
Where Does company Money go, Exactly?
What any business owner are looking for, are all the ways they can continue to grow their business and keep the quality high while cutting down on costs. Despite your best efforts to plug the gaps, the company management may be overlooking some money leaks—some obvious and some not-so-obvious.
1. Payroll – Employee salaries and wages are often one of the highest costs of running any sizes of business, and the payroll your business pays out could be costing more than they should. The answer, however, is not to go firing people so you can reduce it expenses. Check for these types of employee-related money leaks instead:
- Having the right employee in the wrong position
- Outsourcing tasks that could be handled by an hourly employee instead (at a lower cost to you)
- Not hiring enough people to get the work done
- Micromanaging style rather than training them to do their jobs themselves
2. Rent – Do the company really need all the space it’s paying for? Remember that space costs the company more than the rent check; it also costs it in maintenance, repairs, cosmetic updating (new window displays, signage, etc.) and utilities. Use the space it’s paying for, or quit paying for it, and save the business much-needed cash.
3. Small stuff – Don’t sweat the small stuff, but don’t spend too much on it, either. Little expenses office supplies, uniforms, morning coffee and bagels for the staff—can add up to be a big expense. This doesn’t mean you should cut out all the extras or demand that the employees bring their own staples to work. Just be aware of what company spend, make sure the purchaser shop around for the best prices and don’t purchase things that aren’t needed or used. If that office supply closet already has 31 reams of printer paper, do you need more?
4. Internet and phone service – If you haven’t done any price comparisons on your Internet and phone service in the last six months, start today. You may find that you’ll save money by cutting off that business line and getting company cell phones, or vice versa. It’s not just about the cost, however. It’s about what best meets the day-to-day working needs of your team. Figure out what they need to do their jobs efficiently, compare services and prices and then take it one step further by personally talking with a manager to negotiate an even better deal. Remember, those services are also businesses and they want (and need) your business. Let them earn it. If they’re not willing to at least talk about a better price, a better deal, or a better contract, go talk to their competitors.
5. Financial fees – You should also make it a habit to compare fees charged by your financial institution. What is the company paying in monthly banking fees, and can you find a better banking relationship somewhere else? If you find that you can, make a call to your current bank’s manager and ask for the same terms that you can get somewhere else. You may be able to negotiate a better deal without having to switch your account. Watch your late fees and interest charges, too. These can add up to huge costs if you’re not careful. Obviously you can’t always avoid interest on inventory payments and the like, but there’s absolutely no sense in losing money on a late fee just because you forgot to pay a bill. Schedule your payments, check your accounts regularly, and pay your bills before they’re due. If you know you won’t be able to pay by the due date, call and ask for an extension.
6. Not-so-obvious – There are also a few less-obvious ways you might be leaking money in the business. Ask yourself these questions to find the holes in your financial ship:
- Do the company has clearly stated policies and procedures for the employees? Do the company have understandable, clear policies on vacation, sick days, personal days, insurance, benefits, liability, and the process of hiring and firing? Reinventing the wheel every time an issue comes up is expensive.
- Do the company has a way to measure the efforts and money it put into marketing, or is it just throwing stuff out there and hoping it works?
- Do the management stuck in traditional ways of running my business, or is it willing to let go of old methods that don’t work and move to more efficient systems?
- Do everybody in the company complete what they start?
The final questions I ask, and perhaps the most important ones, are these:
- Are these out-of-the-ordinary results are going to continue for a longer period of time?
- How long has it been developing and how long will it continue?
- Can they be remedied and the lost sales and earnings recovered in this fiscal year?
- How? And who’s going to get on that right away?
And most important of all: Does it or will it impact the bottom line of the company? By how much?
Now you know the first secret of quickly identifying what to look for in financial statements that reveal issues, problems or mistakes made. Ask “where do the company money go” yourself first, even before the boss start questioning.
Catching financial problems makes you a great employee. But solving it makes you a great asset!