HOT SPOT ACCOUNTING
Successful business management requires focusing on a limited number of activities that have maximum impact on success. Accounting for these "critical elements" or "hot spots" is the topic of this article.
"Accounting" usually brings to mind the traditional general ledger and subsidiary ledgers like accounts payable or accounts receivable. Hot spot accounting usually has no direct tie in to the traditional books. Instead, we are alluding to "accountability" for the company's most important functions. A company that successfully accounts for these critical activities will be stronger and more profitable.
The critical elements of each business are unique. Generally, critical areas of a business involve increasing sales, increasing production, or controlling costs. For instance, the heartbeat of a construction company is often the quantity and quality of bids on jobs. A critical element for a consumer products manufacturer might be the introduction of new models, in order to stay ahead of competition. A restaurant might find that controlling food spoilage is critical.
We find that the management of a company can usually assess the hot spots of the business, at least in general terms. In fact, we often find that the owner/manager has spent considerable time defining and reviewing the company's critical elements.
The next step, after defining the critical element, is to describe specific activities that lend themselves to measurement. In our example of bidding and estimating for a construction company, measurable activities could be:
- Number of bids per week
- Dollar volume of bids per week
- Number of successful bids compared to total bids
- Comparison of company bids to competitor bids
- Comparison of accuracy of original bid estimate to actual cost on closed jobs
- Obtaining a good understanding of the bid documents
- Constructing the bid estimate at the proper detail level
Once the measurable activities have been set out, the company should install an accounting system for tracking them. Continuing our example, a form should be developed documenting the estimator's understanding of the scope of the job. The detail level of the bid should be evident. Part of the procedure of closing a job, along with lien release and retention collections, should be comparison of actual cost compared to original estimate. The company should set up a log for tracking the number of bids, the dollar volume, and the success rate.
After these accounting procedures are implemented, the most important step must take place: management must assimilate the information and make knowledgeable decisions.
Ideally, the accounting system will create daily, weekly, and monthly reports to management. Management should develop the habit of reviewing and analyzing these reports. An agenda for reviewing the reports might include comparison to prior periods, comparison to industry benchmarks, a six month trend analysis, comparison to budget, or perhaps just a general review and brainstorm session.
After reading this article, you should ask yourself:
- What are the elements of this business that are critical to success?
- Am I monitoring these critical elements effectively (ie: timely, accurately, succinctly)?
- How can we improve the accountability for these vital business components?
The accounting for hot spots, when combined with your traditional accounting (income statement and balance sheet) becomes your company's report card. This reporting system will itself become a critical element to your business' success.