Growing a business requires great planning, analysis, and accountability. To make sure your processes and systems support the reporting necessary to easily achieve those three pillars, you will need an Enterprise Resource Planning (ERP) software that gives you a 360° view of your business.
If you are a mid-sized company eager to grow in the market, adopt these five best practices about budgeting and analysis to grow your midsized business using a cloud-based Enterprise Resource Planning software like Oracle NetSuite.
1. Establishing Accountability
Growing a company is all about empowering employees, apart from the owner, to make business decisions that will help the business achieve its mission. In other words, transforming employees in entrepreneurs that will act as business owners of a sub-section of the main business. Such delegation of powers requires certain boundaries, controls and clear objectives to which those employees will be held accountable for.
As such, the first step in your preparation for growth is compartmentalizing your company into departments that are led by employees that will be held completely accountable for the financial results. To achieve this, your accounting processes and systems must allow for such segregation of data and the related reporting. In other words, you need an ERP that will allow for what is typically called segments or dimensions beyond the typical “account”.
Once you have the right systems in place, be aware that transparency is key. If such employees will be held accountable for financial results, they should be part of setting up those targets and should, therefore, have visibility of the results.
2. Controllable vs. Non-Controllable Expenses
When compartmentalizing the company, entrepreneurs are faced with a dichotomy where certain expenses might belong to a department, but such expense is not controlled by the employee being held accountable for such a department. The most common example, in this case, is the rent in a store. The store manager might be responsible for the store financial figures, but the store rent is negotiated and controlled by the central office. As such, the store manager should not be held accountable for the rent expense.
Modern accounting software should allow an adequate categorization of accounts and transactions by allowing filters in the financial reports to dynamically present Profits and Losses (P&L) with and without controllable expenses. In this example, the store P&L for accountability purposes should only include controllable expenses. However, for profitability purposes and to understand the store’s contribution to the overall company, the store P&L should bear all the costs, controllable and non-controllable.
3. One-time Charges Isolation
There are business as usual transactions and then there are those exceptional transactions that entrepreneurs know that will not happen again. Those might be related to good luck; a customer placed a big order for a one in a lifetime project. Or they can be related to bad luck; a customer sued you and you are spending quite a lot on legal fees. These transactions should be typified as one-time charges in your accounting software. Isolating those charges is key for financial reporting.
To understand your company’s real performance, it is key to filter out in an easy way, those transactions. As, well, when preparing your next year’s budget, it is also important to have those on time charges excluded as you already know, they will not happen again. Make sure your system has ways to easily classify the one-time revenue and expense transactions as well as the way to exclude them for financial reporting purposes.
4. Segregate New Business vs. Current
In the retail business, the concept of Same Store Sales is very common. That means that retailers will generate two sets of financial reports, one that will include only the stores that were open during or after the prior year and other reports that will include all stores. This is also called comparable reporting. The same concept can be applied to products, lines of business, geographies, customers, etc. Depending on your industry, you might want to separate your current business, i.e. installed base business vs your new business/ventures.
Make sure your accounting software allows for such segregation in an easy way. For example, some modern systems can filter the content in the financial statements with lots of flexibility, for example, to only include stores opened on or before a given date, only include customers activated on or before a specific date, etc. This is key for decision making and performance analysis.
5. Segregate Strategic Investments
Again, one thing is your business as usual versus what you do to continue expanding and growing your business. When implementing strategic investments that might require extraordinary expenditures, those should also be typified as such to facilitate adequate reporting of operations. Contrary to one-time charges, that are non-controllable, strategic investments are controllable and are taking place because of a firm decision made by management. An example of a strategic investment might be international expansion.
If a company decides to expand beyond its borders, expenses such as marketing research, tax research, traveling expenses, legal expenses, etc. will increase. Such expenses will have an impact on the overall profitability of the company. As such, if one wants to understand the status of the operations, those expenses should be excluded from the company’s P&L.
Modern accounting software should allow for that exclusion. The system must allow management to toggle the income statement dynamically to include or exclude these charges, depending on the analysis being made. Having this functionality is key for budgeting and planning as well. Operational budgets vs. strategic initiatives budgets shall not be commingled as both have different behaviors.
With NetSuite, you can unify all your business processes in one place. Integrate operations such as CRM, Enterprise Resource Planning (ERP), Integrated Processes, Lead to Cash, Procure to Pay, Service, Request to Resolution, Time to Payroll, and more.
Take advantage of this comprehensive system to add value to your company. Improve your workflows, reduce operational costs and capitalize all the assets of your company. In Fusionworks, we can help you with this and other business processes. Don’t hesitate to contact us and request a free demo of NetSuite, the #1 cloud-based ERP. Let’s grow together!
This article was written by Jorge Mejía, CPA, Director of Fusionworks.