Characters Who Can Make Or Break Your Small Business is a wise and witty new book from accountant and print industry veteran Michael Best. Through 39 characters he identifies the issues faced by small business owners and offers advice backed up by real life examples. Images will be running excerpts from the book throughout 2019 – we‘re kicking off this month with the accountant chapter

The mere mention of a chartered accountant (CA) can send a cold shiver down a small business owner’s spine, particularly in the early years after start-up when expenses must be carefully controlled and cash preserved. I know – I’ve been on both sides of this fence, first as a CA providing small business owners with accounting and auditing services, and then as a small business owner. But, cold shivers notwithstanding, an accountant is one of the more important companions to take along for the journey down the road to small business success. And by ‘accountant‘, I refer more to the function than the title.

You don’t necessarily need a big-firm, big-fee CA. What you need is someone to provide accounting services at a level of expertise appropriate to the nature and complexity of your small business. Accountants aren’t likely to be particularly exciting or newsworthy in a hero-saves-the-day kind of way. In fact, it seems that when an accounting firm is mentioned on the news today it’s in the role of villain rather than hero for having not detected a massive fraud perpetrated at another failed multinational conglomerate. 

The fact is, though, thousands of small business owners will tell you that their accountants, while never likely to be publicly hailed as heroes, are heroes for a number of reasons. In the small business arena, accountants stand between chaotic and orderly records, late and timely tax returns, well-reasoned and reckless pricing, and in some cases, between survival and failure. Every small business owner should have such a hero.

The type of accountant you need

When you need medical services (and all of us do), your practitioner is chosen based on the nature of your need. A paramedic might be able to quite easily handle your need, but if it’s more complex, you might require the attention of a GP. And if it’s really complex, you might need a specialist – one of those people with a wall full of framed certificates and a 12-month waiting list.

Similarly, when you need accounting services (and all business owners do), you must choose your practitioner based on the complexity of your need. You might only need someone with basic bookkeeping skills and the input or review of a fully qualified accountant from time to time. But as your business grows and becomes more complex, you might have to head for the plush offices of one of the big accounting firms. Regardless of the nature and size of your business though, you’ll need accounting services as surely as we all need medical services, not just as the business grows, but indeed, to help the business grow.

Your accountant as an advisor

Small business accountants will primarily fulfil the traditional role of maintaining accounting records, preparing financial statements and completing tax returns, but they can also contribute valuable, basic, day-to-day business advice. They can be helpful when you need someone to crunch the hard, cold numbers and shine the light of reality on concepts such as the latest sales-boosting scheme or discounting programme. Failure to consult with someone knowledgeable, most particularly an accountant, on key matters such as costing, pricing and margin determination can be very costly and, in some cases, disastrous.

Michael Best shares his business wisdom in a witty, easy-to-read format

Greg’s ‘happening place’

Greg was the production manager at a large Canadian textile screen printing company that, for the sake of this story, I’ll refer to as Nordic Imprinted Sportswear. Nordic printed large volumes of imprinted sportswear and counted among its customers most of the large brand-name sporting goods wholesalers. Another prized customer was a North American wholesaler of promotional garments for big musical events, primarily rock concerts. They referred to this prized customer as their ‘rock ’n’ roll‘ customer.

Nordic’s customer list was the envy of the company’s competitors. Unknown to most, though, the enviable volumes were secured by virtue of very low per-unit prices and hence, very tight margins. During negotiations with my company regarding the price of inks and chemicals Nordic bought from us, Nordic’s accountant was frank. The figures he disclosed indicated razor-thin margins. That, as you can imagine, placed a lot of pressure on Nordic’s management to keep input costs down and production volumes up. They had an extensive infrastructure, including a large number of automatic presses that had to be paid for and therefore kept occupied. 

This left them with very little leverage in price discussions because their large customers knew that Nordic needed volume to survive and could therefore be ruthlessly squeezed on pricing. Greg had struck up a friendly relationship with a rock ’n’ roll customer executive that led to him leaving Nordic, persuading a few Nordic employees to join him, taking the rock ’n’ roll account with him and starting his own textile screen printing company. I visited Greg’s new business about a month after he started up. He proudly gave me the grand tour, boasting, “It’s so totally cool that I’ve created this happening place.” Greg was very pleased with himself for having ‘stuck it to Nordic‘. When I asked whether he’d managed to negotiate a good price with the rock ’n’ roll customer, he said that he’d only had to give them a slightly better price than Nordic was charging. I asked whether an accountant had checked the viability of his pricing and he assured me there was no need for that because if Nordic was making a lot of money at those prices, then he would too.

I had not been invited to offer business advice and when I sensed that I might be crossing a line, I refrained from sharing my immediate thoughts. Instead, I just said, “Good luck, Greg,” climbed into the car and, before even turning the key, called the office to tell our accounts receivable person to keep a close eye on Greg’s account. Six months later we received a package from a firm of trustees in bankruptcy and wrote off Greg’s bad debt of a few thousand dollars. Consulting an accountant or someone with similar expertise on something as fundamental as pricing can make your business; not doing so can break it.

The vexing issue of discounting

Any accountant in public practice can tell you about small business owners who make decisions on everyday business matters influenced more by what everyone else is doing rather than by the impact the decision will have on their businesses in their peculiar circumstances. For instance, a close and equally troublesome relative of pricing is discounting. It’s a strategy commonly used to boost sales for any number of reasons. Discounting can be quite useful in dealing with inventory situations such as overstocking or redundancy. Businesses run into trouble with discounting when using it as a volume-boosting strategy. Typically, small business owners don’t properly analyse their discounting schemes and, as a result, these schemes can be more harmful than helpful.

Andrew’s 10% discount proposal

Andrew was running one of our regional operations. With a marketing-focused masters in business administration (MBA) from a respected business faculty at a US university, he was more than equipped for the job. The lesson to be taken from this story is that if the subtlety of numbers can escape an MBA’s scrutiny, then small business owners less schooled in the intricacies of interpreting numbers should at least solicit a second opinion from an accountant or similarly qualified resource.

I had gathered the statogether for a review and strategy meeting where Andrew suggested offering his customers a discount to attract more sales. I should point out that we were distributing the highest quality and highest priced products in a restricted and price-conscious market not particularly concerned with quality – quite a marketing and sales challenge. Andrew was influenced by the phenomenon we all see quite regularly, but never more so than on Boxing Day. However, discounting is not a one-size-fits-all solution. Individual market circumstances can vary greatly and therefore it cannot be assumed that an effective discounting strategy in one circumstance will be effective in another.

Andrew was overlooking the fact that we operated in a restricted market with a finite number of potential customers when he proposed that offering a discount would enable him to attract more sales in his territory. My immediate question about the size of discount he had in mind and how such a discount would affect our margins, wouldn’t have surprised anyone in the room. I was aware of my ‘Margin Mike’ nickname. “A few points won’t get anyone excited, so we’d have to offer something like 10%,” said Andrew. Everyone in the room seemed to be comfortable with a 10% discount. Considering how accustomed we are to seeing ‘40% off‘ and ‘50% off‘ signs in the shops every weekend, this wouldn’t have sounded excessive. Margin Mike then demonstrated that, given our pre-discount gross margin of 33%, to restore the gross margin given away by the 10% discount, we would have to increase our sales volume by 43%, ie sell 43% more product. This would only get us back to where we were in gross margin dollar terms before offering the discount. You can test the arithmetic yourself quite easily.

Andrew immediately poured cold water on any possibility of finding an additional 43% of product sales in his territory. We didn’t even attempt to determine what it would take to increase the bottom line if we took the additional handling and administrative costs associated with 43% more sales into account. It wasn’t necessary. The 10% discount idea obviously made no sense once it was reduced to numbers. The moral of Andrew’s discount proposal? If you’re not a number cruncher and don’t have a number cruncher on staff, hire the services of one. See an accountant before jumping to conclusions; conclusions that could be disastrous.

This is an edited excerpt from Characters Who Can Make Or Break Your Small Business by Michael Best. Through 39 characters, Michael covers all aspects most small business owners can expect to encounter in the life of a business from inception to disposition. It can be read linearly or used a reference book to be consulted when confronted with a particular issue. Real life examples and anecdotes presented conversationally means it’s not your average, boring business book. It is available from:

www.smallbusinesscharacters.com
www.amazon.co.uk