Organizing “Back Office” Operations

By Paul A. Janssen

As you prepare to delve headlong into the realm of entrepreneurship and begin running your own business enterprise, take a little more time to effectively organize the operations of your business. The time spent doing so at this juncture will pay tremendous dividends in the not-too-distant future and will continually reward these initial efforts.

Let’s begin by setting up the “back office” operations of your business. These include those functions involved in tracking revenues and expenses, maintaining cash flow and supporting the day-to-day transactional needs.

Unfortunately, some may consider these functions somewhat mundane. (Suffice it to say that they are often not quite as sexy and adrenaline-pumping as generating revenue, growing your business to greater and greater heights, or being interviewed by highly esteemed business publications or local media.) These functions are, however, CRUCIALLY IMPORTANT if you aspire to grow your business substantially, improve profitability or actually get pursued for those business tycoon interview opportunities.

Don’t panic; this is just good basic business organization and operations. Let’s start with obtaining a basic accounting software program. There are many basic programs on the market that are very user friendly, yet afford the capacity for much greater detailed tracking and reporting as the business grows. Your tax advisor can provide specific recommendations, often one that will sync directly with his or her software, thus making year-end accounting and tax reporting much more efficient for both of you.

It is very important to learn how to obtain and understand some of the basic “canned” financial reports that your software provides. Money is the life-blood of any business, and financial statements are the way to constantly measure and monitor your business’s blood pressure. Running monthly Income Statement, Balance Sheet, Cash Flow Statement, Aged Receivables and Aged Payables reports should be sufficient to support your business initially and provide the basic information you will need as you grow revenues upwards of at least one million dollars annually.

Learning to read and understand those financial reports is not as daunting a task as many believe, and help is readily available from many reputable sources, including tax and accounting professionals, business consultants, local colleges and government agencies.

Next you’ll want to establish a few basic back-office functions, such as Accounts Payable (A/P) and Accounts Receivable (A/R) systems. One file drawer for each, labeled accordingly, should be more than enough initially. One very simple but effective system is to set up a separate file for each letter in the alphabet in both the A/P and A/R file drawers. For easy retrieval to deal with any future issues, paid A/P and collected A/R should be put into separate files that follow the same alphabetical setup.

Businesses that do not sell on credit or invoice for products or services will not need the A/R system and usually get by using only a cash-receipts system. These paper file systems support A/R and A/P Aged reports produced by the accounting software and help organize these important business functions. To avoid spending an inordinate amount of time on these functions, you should set routine ongoing dates for entering cash receipts, billing/invoicing, and bill entry and payment. The type of business, i.e., retail, service, etc., will drive the necessary frequency of entering cash receipts or generating invoices.

Organizing and tracking revenues is another critical step in operating your business successfully. Regardless of how your business generates its revenues, you should identify and track them in an organized, meaningful fashion. You can segregate and track revenues by product, service, customer, profit unit, region or other relevant method that identifies both the specific source and respective amounts of each revenue stream.

This enables you to recognize the customers, products or services that generate the greatest amount of your revenues, and also allows you to compare the profitability and amount of contribution to the bottom line from each individual revenue stream. This level of revenue detail can be integrated into future strategic planning and marketing initiatives to grow your business and improve its profitability, by helping to target and capture a greater market share of those more lucrative revenue streams.

Another important function is to establish a method to monitor and control your business expenses. Knowing exactly what expenses your business incurs is of equal importance to knowing how much those expenses total in any given period. Business expenses frequently increase disproportionately to revenue growth as a new business starts expanding and increasing its presence in the market.

As total revenue grows, it’s not unusual for small businesses to experience smaller profit margins. If your business doubles its revenue without controlling expenses, you may find you’re working twice as hard to make even less profit than before. There are several easy methods of tracking expenses individually. Begin by itemizing all expenses, which you can then compare by each line-item expense against the identical expense amount from previous accounting periods. This is a quick method to review expenses to identify disproportionate ones. Like any other corrective action, the next step is to identify how to reduce or control excessive expenses.

By organizing and setting up these few back-office business functions, you’ll better understand your business and have the tools needed to become a successful entrepreneur and business owner.

© 2010, Paul A. Janssen

Paul A. Janssen, Principal
Management Enterprise Services, Inc.
mgtent@cablespeed.com
410-703-2218

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