A Principle of Profitability

Universal Accounting Center is all about helping small business owners like you improve profitability and, consequently, the longevity of your business.  Under the Universal Business Model (UBM), there are three business functions that must work well together in order to increase revenue: accounting, marketing, and production. Any of these business functions that act independently of the other two can doom a company.

Marketing and accounting get a lot of coverage in this newsletter.  Today we’d like to focus on production: the internal workings of a business—a business’s profit center.  When the profit center is running well, the entire business has profit potential.

In order to improve production, and in turn improve profitability, you must look at ways you can improve your internal processes.

Improve Internal Processes

If you perform the accounting for any business, you provide business owners with data that can influence key business decisions.  As such, you should always help search for ways to better analyze and improve an organization’s processes. This is best done by asking questions. In fact, you should never stop asking questions, the most important of which includes, Is there a better way to . . . ?

This is the basis of continuous improvement; you must always search for a better way to accomplish a business’s main functions.  Every employee has either external customers (those who pay for a company’s products and services) or internal customers (those other employees for whom a company provides service). Meeting the needs of all customers should be the primary focus of a business and its employees.  Customer needs are always changing; therefore, a business’s processes must continually change as well. This is what quality is all about—meeting and exceeding customer needs at the lowest possible cost.

Here are some guidelines for helping clients improve internal processes:

1. Find the problem and create a solution.  Once you have identified the problem, or area for improvement, the first step is to brainstorm potential changes. Then, quantify the cost and potential revenues. Next, test your theory by making the changes. Finally, work for the results you want, evaluating all possible outcomes.

2. Use data and information from your accounting system to help solve problems.  This information comes from your historical database of revenues and expenses within your accounting system. Without this data, businesses are shooting in the dark and missing most of the time. You should present this information to clients in such a way that they can use it to increase their business’s profitability.

3. Continually benchmark against competitors.  One of the most insightful tools to identify a business’s strengths and weaknesses is to compare its financial information with that of its competitors. To make this tool useful, you must analyze a business against other businesses of equal size in the same industry. This is called “Benchmarking.” From this study, you can identify areas in which the business is excelling and should maintain. More importantly, it will identify areas of interest where competitors may have figured out something your client’s business still needs to learn. Much competitive information is available for free, or for a nominal cost, from different business and industry associations across the country.

“Improve Internal Processes” is just one of 9 principles that will make any business more profitable.  Allen Bostrom, president of Universal Accounting Center, has written the book In the Black: 9 Principles to Make Your Business Profitable to help small businesses succeed.  You’ll find that knowing how to help your clients apply these principles will make you the premier accountant in your area.  If this one principle has given you added insight in helping clients improve their business processes, visit our site, Are You in the Black, to purchase a copy of this book.