Most of you would say, that this might not be the most important problem small businesses have to solve during their business operation. Well, that might be true, but on the other hand, if your business has an early-warning-system, than it could assist you in operating your business and keeps you focused on solving the bottlenecks you are actually facing.
But first of all, in case of Early-Warning-Systems it is necessary to define what a small business is. A small business is usually a business operated by 1 or a few people, but could also be a company with as much as 500 employees. This article concentrates on small businesses with 1 to 50 employees. As this is the definition of small business, than we have to define what an Early-Warning-System should look like.
While running a small business, the people involved usually have not the time dealing with Early-Warning-Systems a lot. Because of the lack of time, there has to be a lean solution, which takes care of the following things:
easy to use solution
not time consuming
showing recommendations for possible actions/measures on early warnings
giving priorities which bottlenecks have to be solved first
having a short reporting cycle
a reasonable price, every small business could afford.
Lets go to the list one by one.
Easy to use solution
What does that mean? On my opinion, easy usage is, when something is easy and fast to understand. Something I do not need to read a huge book with hundreds of pages or where I have to attend a training, which keeps you occupied by several hours or days, just to know the basic features.
Having a system with huge databases and many features and reporting alternatives, is not only time consuming, it is also annoying, because you ever feel you need to perform a lot more reports. And you always feel that you may missed something.
Furthermore a good Early-Warning-System solution should work with only few input. But that’s another point.
Not time consuming
When you have to input a lot of data that is one possible time consuming task. On the other hand, you do not know, if a huge database will make your Early-Warning-System better. So it is better to focus on a few important data, than having a huge database, which you probably never use.
When concentrating on important data, you are not able to use every data from your business operation directly. Some data have to be calculated to business ratios, which are a better basis for analysis. But this brings to mind to select the right business ratios. There are so many to find.
Well, there are a few which could be used for all kinds of businesses, such as
Customer Contacts
Complaints
Orders in Process
Customer Loyalty
Usage of capacity
Order Processing Time
to show just a few. Would be an analysis, which uses only 30 business ratios or business numbers a time consuming solution? I guess you say no. But, what would be if you have to fill in these numbers every day? Well, that’s not necessary. One time a week should be enough.
However, even if 30 or 60 values for business ratios per week does not sound much work, but there is a little more work to do upfront, before you could use these values for analysis. You have to find the values in your company, you have to calculate the business ratio values and so on. This I believe sounds to be a lot more work as you thought.
When you install the right procedure to get the necessary data for analysis, you may have an addition big one-time work. It’s all in the procedure you choose. Make it as easy as possible and it won’t be a time consuming task.
Recommend actions/measures
Early-Warnings are signs, which a system should generate, when a point is reached you said it should inform you that a situation is going to be worse. There are many systems out there providing early-warnings, but the question is always, on basis this warning has been calculated and to what will it lead you.
To understand an early warning signal it should be as easy to understand as a traffic light signal. Green says that everything is all right, yellow shows you that caution has to be taken and red should bring the alarm clock ringing at you.
Well, providing recommendations for actions/measures is not a very important feature, but if you are not familiar with business operations or just starting a business it is of help to get recommendations for actions/measures to keep your business running.
But even if you have lot of experience runninga business, it is sometimes very helpful to get new ideas on how to act. Actions/Measures could only be a recommendation here, because industry sectors are different, and it wouldn't be possible to cover all types of businesses.
Showing priorities to solve bottlenecks
Remember the paragraph above about early warning signals, they could be used to find priorities to solve bottlenecks in business operation. First of all the warning signals must follow some rules. That means that the business ratios supplying the signal have to be in a consecutive timely manner to each other. For example, when you have 5 ratios depending on each other in a consecutive manner, than you have automatically a priority to follow when actions are needed.
In case your ratio number 3 has a yellow signal and number 4 a red signal, than you know that you first have to solve the problem ratio 4 is showing, because you got the red flag and it has influence to ratio 5, which was green. This small example shows how important it is to use the right business ratios and how important it is to concentrate on the traffic light systematic when taking actions.
Short Reporting Cycle
A short reporting cycle may be a month for some business operators, but when waiting for Early-Warning-System analysis for about 4 weeks, you are only able to take action on erroneous trends once per month. And in some cases this could be already to late.
Really short is a reporting cycle, which uses a week as its basic period. Why using reporting cycles of one week? Just because you can see erroneous trends earlier and being able to take actions, while others are still waiting their reports to come. On a weekly reporting cycle you could act at least 3 to 4 weeks earlier as on monthly reporting cycles.
I don’t think you are driving your car blind for more than a small part of a second. Just imagine what happens, when driving your car blind for a month, just like the usual reporting cycle for business reporting? You are right, just a few seconds after start driving you have the first accident. Even if you are an airline pilot and having an autopilot system, you steadily have to control the system, to be sure that you are heading in the right direction.
Reasonable Price
Reasonable is a price, which nearly all small businesses could afford. Even if the price is paid in instalments or as rent for the licence to use a system. An Early-Warning-System, as the lean version described here, doesn't has to be very expensive.
However, the decision is yours, if you like to pay more or less on an Early-Warning-System, but you should carefully check the features and benefits a solution offers.
Conclusion
Early-Warning-Systems for small businesses is a very important and often overlooked issue, which could assist to establish a more focused business operation, but only when the Early-Warning-System shows actual bottlenecks and is able to provide priorities for actions/measures.
However, most small business owners or operators are not aware of the problems Early-Warning-Systems could bring them before there eyes. Furthermore, the possibility of finding new target markets, new solutions or ideas to improve existing products, is just a benefit an Early-Warning-Systems solution may offer as well.
If you think the described solution is not an Early-Warning-System, because an Early-Warning-System has to be something where you have to handle lots of data and documents, well, that might be another definition for it, but starting with a small solution is always better than doing nothing. There is no reason to use a big system to provide early-warnings, and for small businesses big systems don’t make sense at all.
About the author:
Stephan Szugat is founder of abenetis a web-based service about Business Management Solutions focusing on the core needs of business management. This includes Operational and strategic analysis especially Early-Recognition-Systems, Knowledge-Management and other Services for small and mid-sized businesses. He has approx. 15 years experience in the Finance and Accounting Area from companies of different size and from various industries. http://www.abenetis.com
Picking A Small Business
Accounting Program
by: Stephen L. Nelson, CPA
A small business accounting program should accomplish three tasks:
track income and expenses, generate business forms, and keep detailed
records for other assets and liabilities.
Tracking Income and Expenses
The task of tracking a business’s income and expense is really the most
important job of an accounting system. If you own or manage a small
business, obviously, you need some tool for measuring your income and your
cash flow.
Although checkbook programs like Quicken and Microsoft Money does
little more than keep a checkbook, you can actually keep financial records
for a business right out of a checkbook. To do this, you simply categorize
deposits as falling into some income category. And when you write a check
or make some other withdrawal, you categorize expenses as falling into
some expense category.
One problem with using a checkbook program, however, is that by using a
checkbook program, you are implicitly using cash-basis accounting to track
your income and expenses. Cash-basis accounting counts income when you
receive a deposit and counts expense when you write a check.
Cash-basis accounting is easy to understand, and that means you are
less likely to make errors in implementing it. However, cash-basis
accounting is generally too imprecise for more complicated businesses. If
you use inventory in your business, for example, cash-basis accounting
isn’t very accurate—and the Internal Revenue Service does not allow it.
And there are other circumstances, too, in which cash-basis accounting
produces serious and usually unacceptable errors in precision. For
example, if you often receive money before you have actually earned it or
if you often incur expenses long before you actually have to pay for them,
you need to use a more sophisticated accounting program than a checkbook
program.
Generating Business Forms
The second task that a small business accounting program should help
you with is the generation of business forms. The most common business
form is simply a check. Any checkbook program help you do this. Other
business forms that small businesses commonly need to produce include
invoices, credit memos, monthly statements, purchase orders, and so forth.
If you have a small business with very simple form requirements—perhaps
you need only checks—then a checkbook program may work very well for you.
However, if you have extensive or complicated business form generation
requirements, a more full-featured small business accounting package, such
as Intuit’s QuickBooks, Peachtree’s Complete Accounting, or Microsoft
Small Business Accounting will do a better job for you.
If you produce more complicated forms, but you produce these other
forms with a word processing program, then a checkbook program may still
work for you.
Detailed Record Keeping for Other Assets and Liabilities
The third task that a small business accounting program should help you
with is detailed record keeping of your most important assets and
liabilities. A checkbook program lets you keep good detailed records of
cash, and for some businesses that is the principal asset. But many small
businesses have other significant assets and liabilities they need to
track, for example, accounts receivables, inventory, and vendor payables.
Whether or not a particular software program’s accounting tools provide
adequate asset and liability record keeping depends on the situation.
However, no small business accounting program does everything you need it
to do. Any accounting program that provides an extensive list of features,
by its very nature, becomes a challenge to use. For example, moving to the
accrual basis of accounting adds an entire layer of complexity to
financial record keeping, and keeping detailed records of inventory adds
another layer.
For these reasons, even when a particular program doesn’t do everything
you need it to do, your best choice still may be to use the program—and
then simply live with its shortcomings.
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