The Hindu Business Line : 12 financial must-knows

There are five basic ways to add `obvious value' to what you offer to customers. The first is easy, `cut your price,' say Don Taylor and Jeanne Smalling Archer in the second edition of Up Against the Wal-Marts, from Amacom (www.amacombooks.org). Anyone can cut price, but if you aren't the low-cost provider, `this method can take you right out of business,' caution the authors.

The second way should interest accountants, because it is about reducing costs. "Wal-Mart was able to operate on about half the expense that their largest competitors consumed as operating costs. They passed part of the cost savings along to their customers in the form of lower prices."

In the chapter `Knowledge is power,' the authors remind that you can't manage numbers you don't have. "Sound financial management is based on facts, not feelings. When you have good numbers (facts), you will be able to plan, organise, and control what has to be done." Records are vital say Taylor and Archer. "Like a good football play, your records must be simple, timely, accurate, relevant, and consistent."

The book lists `twelve financial must-knows', which are critical to success. The first five are from the income statement: sales, cost of goods sold, gross profit, operating expenses, and net income. The rest are: inventory, inventory turnover (to know how fast your merchandise is moving), accounts receivable management, accounts payable management, cash position, liability (debt) position, and owner's equity.

"Man is a tool-using animal. Without tools he is nothing, with tools he is all," is a quote of Thomas Carlyle with which a chapter titled `The manager's tool box' opens.

The authors discuss 22 management tools to help you analyse financial statements, find out what customers really think about products, assess business efficiency, and determine the strength of market position. The first is `the common-size analysis tool' to convert the values in financial statements to percentages, with sales amount or total assets as the base.

Another tool is `the BackTrac financial trouble-shooter tool' that speaks about `four common symptoms of troubled businesses'. These are low or declining net income, gross profit margin, sales level, and cash. Backtrack from the symptom to find the potential causes, advise the authors. For instance, declining gross profit margin may be due to poor purchasing practices, shoplifting, undetected short shipments from suppliers, inaccurate counting when taking inventory, inadequate mark-ups and so on.

Yet another tool is `variable pricing'. This is `a seven-step strategy for maintaining desired profit margins for your business without losing the perception of value in your customer's mind'. As a first step, "know your competitors' prices for any item you sell," urge the authors. "Your customers, who are not vitally interested in your success, take time to notice these prices." But you need to `stay on your toes'. Follow `the Kaizen strategy' of continuous improvement by adopting as many of the 292 tips that the book offers. `Compute your customer batting average (total walk-in traffic divided by the number who make purchases),' is tip six. `Check every expense category on your income statement against businesses of similar size in your industry,' reads tip 39, which is just one of the 95 suggestions to save on costs.

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