The Basics of Business Systems
Why do I need a business system?
Great question. It’s about having consistent, constant, financial control of every aspect of your business. Business owners often start a business because they want to work for themselves rather than working for someone else. Owning or managing a business is completely different than working in a business. Installing, learning and understanding business tools is the first step in working on your business.
“I didn’t make money with my business until I stepped out of the shop and started working on my business rather than working in my business” Dalen, Dalen’s Diesel
So what are business controls and what do they accomplish?
Controls are a subset of business systems which specifically help protect your company from careless, costly, or uninformed decisions or behaviors. When you build a business versus a job, you want your team to have the authority to get tasks done without running everything past you. You want them to take the initiative and have the discretion to make decisions and get valuable work done without you being the limiting factor that slows the business down. At the same time, you want to ensure that the business is protected–that the right things are getting done, at the right time, and hence producing the right results. Your business must be confident that resources are focused on what matters most, and that simple mistakes that can and should easily be avoided, are.
Business systems are the instrument that business owners use to tune their business and control every aspect of their business.
Things you must control:
Nothing eats up cash flow and profit like inventory. A good business owner or manager needs an understanding why each piece of inventory is purchased and stocked. Have tight control of pricing and margin. Insight into what’s moving and not moving. And last, an ability to understand and manage their inventory carrying costs. Making a good profit on parts cannot be done on the back of a napkin, in your head or by winging it. It requires good vendor management, detailed pricing control and constant attention to how quickly inventory is moving. It’s why every major parts retailer and distributor uses business tools to manage these details.
“We have learned more about running a profitable business, because of our business system, than our accountant or a business consultant combined could have provided.” John, Caprock Diesel
If you are selling service you should have a good understanding of your burdened labor costs, fixed overhead costs and your variable labor costs. You need to have good control of service pricing and employee productivity. There is a difference between busy and productive. Busy is when everyone is doing something, productivity is when everyone is doing something billable and profitable. The only way to know the difference is to measure how your employees spend their time and how that reflects on what you are billing. The simplest calculation to determine productivity is to divide the total number of billed hours by the total payroll hours of your service employees.
You must keep good information about your customers, the parts you sold them, work you performed for them and how much they owe you. This information helps you market to them, improve customer intimacy, improve customer retention and ensure prompt payment on your receivables.
A good business system helps you manage relationships with vendors. Tracking how much business you have done with them, types of product lines they sell, discounts and how much you owe them.
Without a good business system it’s very difficult to properly manage cash flow or even understand or forecast your cash position.
Many business owners see cost as what they pay for material and an hour of labor. Real costs account for losses in productivity, material and overhead. Without a detailed understanding of the real costs you are likely losing money or not making what you should. Business systems gather the data necessary to fully evaluate those costs. Allowing you to analyze overhead, efficiency, inventory losses, time-off and other miscellaneous expenses. This level of detail is where the business battle is won or lost.
So what makes a good business system?
A good business system is tailored to your business. It should fit the special needs of your industry. A system designed for a grocery store is never going to work for manufacturing facility. There are inexpensive systems like Intuit’s QuickBooks that are reasonable for businesses that do less than $500K in revenue per year. If you have more revenue than $500K or are starting to have inventory, it’s time to begin the search.
Here is a sample list of good business controls you should look for:
- Visual controls. These include checklists, dash boards, scorecards, budgets, reports etc. They let you SEE that the right things are happening, or if not, they raise a flag that lets you make sure to focus on fixing the situation.
- Procedural controls or business practices. These include things like having two unrelated parties internally check/be involved in the flow of money. Your standard review process for all new hires. Your standardized sales concessions you empower your sales team to use. Procedural controls establish a known pathway to a consistently secure result.
- Embedded controls. These are the controls that work without someone having to remember to do something out-of-the-way to use them. These include things like your standardized contracts, automated data backups, and intentionally designed financial controls that work automatically in the background to protect your business from poor decisions or behavior.
If you want to scale your business and get your life back, you’ve got to find ways to get your team producing more. And business controls (along with better business practices) are one of the key ways you intelligently broaden the base upon which your company is being built.