New tricks in accounting

We have been doing some reading to learn some new techniques for a new client.  Our new client is a manufacturer whose accounting system was set up to operate in a lean environment.  While we have heard of lean and Beth has managed a mill in a lean environment, we had not seen it applied to accounting.  We have read a couple of books on the subject and while I resisted initially, I now get the point!  I next tackled Throughput accounting, written by Steven Bragg.  While I am sure it would not excite a lot of you, I found it fascinating.

The theory behind Throughput accounting is that every business has one area which dictates the speed with which the company operates.  In a manufacturing environment, it is usually a piece of equipment.  It can be due to policies (batch sizes or ordering procedures) or human factors (undersized staff).  The main emphasis initially is to identify the constraint and then to maximize its efficiency.  After that, the business must work to support this area.  There are chapters devoted to scheduling production, pricing products and cutting costs.  Really interesting and a different take on accounting and how it can support the operations and sales functions within a company.  We are hoping it will help our client run more efficiently and, of course, more profitably.

We are hoping to take some time off next week to spend with our families, so we wish everyone a happy holiday season.  Stay tuned in 2012!

Sales mix and contribution margin

As you are creating your budget and planning for 2012 a review of both your product mix and the contribution margin each product brings to your business is important.  The mix refers to the amount of each product you sell compared to total sales.  Most businesses sell at least a few different things and the price is generally different for each product.  The ideal situation calls for the highest margin products to generate the most sales.  This isn't always the case which is why it is important to look at the contribution margin of each product and determine if the pricing is adequate.

Contribution margin can be thought of as the fraction of sales that contributes to the offset of fixed costs.  Alternatively, unit contribution margin is the amount each unit sale adds to profit.  The contribution margin is calculated by subtracting the variable cost of each unit from the price of each unit.  Given the contribution margin, an owner can easily compute breakeven points and target income levels, and make better decisions about whether to add or subtract a product line and about how to price a product. The contribution margin can also be used to monitor the efficiency of manufacturing operations.

All the budgeting and planning we have discussed so far take research, a calculator and time, but the results are worth it.  Small business owners who put this effort into running their business see the growth and profitability they want and need.

Using your budget to grow sales

Now that you have created your budget for 2012, how do you get the most use out of it?  One way to start is the look at the revenue part of the budget.  How did you create it?  What kind of growth are you planning for and how will you achieve it?  You can use your sales growth goals from the budget to jump start your marketing plan.  You cannot hope to achieve sales growth without a concrete plan. This goes back to our earlier post talking about strategic planning and re-determining who your target market is and how to reach them.  You may want to sit down with a marketing professional to review your marketing plan and make revisions as necessary.

This is also a good time to look at staffing.  Do you have the right number of employees with the right skills to implement your budget for 2012?  Having the right people is essential to achieving your business goals.  Next week, we will talk about looking at your product mix and examining the contribution margin for each product you sell.