Equine Business - January 2010
Mind Your Own Business:
Think - plan - organize - execute - make/save money
In the December column I wrote that in business it is often said that 'profit is either earned or saved'. In December we discussed the 'earned portion of profit'. In this column we will discuss the 'saved portion of profit' identified by way of business operating expense accounts. Expense accounts that are set up to be measured and managed will enable you to control your operating expenses, manage your suppliers, conserve your cash, measure expense reduction investment alternatives and help improve your businesses profitability.
Expense accounts are accounts into which expenses incurred in the operation of your business are collected and closed at the end of an accounting period. The expenses incurred operating your horse business has the greatest influence on your profitability.
Simply stated: Net Profit (loss) = Income - Expense
An expense account should identify the reason for the expense. Expense account examples are:
- Contract Labor
Many horse businesses should have subaccounts within an expense category. Subaccounts enable you to measure the expenses within a major expense category. An example would be to separate your horse feed account into the separate feed items: Grain, Hay, Supplements, etc. You may want to further separate your feed items into the types of feed. For example: Horse Feed; Grain; Grain Type 1; Grain Type 2. Being able to identify your operating expenses and the detail within an expense category will provide you with the information you need to better manage your expenses -cost control, purchasing leverage, quality improvement, investment decisions.
You cannot control your cost if you cannot measure it. You can only measure it if you have setup an account that collects the cost.
- Knowing the cost will enable you to improve your purchasing by finding a supplier that provides the same quality at a lower cost. Can I purchase the same item at the same quality for a lower cost?
- Knowing your cost will provide you with the information you need to price your products or services profitably and competitively. Have my cost increased or decreased (unlikely) and if they have by how much? What impact does the cost change have on my profitability and cash requirements?
- Knowing your cost will provide you with the information you need to make investment decisions. Can I reduce or eliminate an expense by investing in a capital project? For example: How much will putting in stall mats reduce my bedding expense? How long will it take to recapture my investment? Is it a good investment?
- Knowing your cost will allow you to reduce your expenses in areas that do not degrade the quality of your business, but improve your profitability and reduce your cash requirement.
If you are managing your business with a software system you need to make sure the system has the flexibility to setup expense accounts and subaccounts that will let you measure your operating expenses. Accounting systems generally do not have the flexibility in their chart of accounts to be able to do this for a horse business. The equineGenie management system has this flexibility and enables you to measure and manage your operating expenses. The equineGenie management system allows you to define unique subaccounts within any account category and the artificial intelligence designed into the software logic makes the necessary connections so you can measure and manage your operating expenses.
Now that we have a good understanding of how to set up a measurable chart of accounts, in our next column we will discuss the income statement, balance sheet and cash flow statement. Remember, spending your time and money wisely may provide the opportunity to enjoy your business more while making more money or at least having more fun with your horses.
Think - plan - organize - execute - make/save money.
'If you can't measure it, you can't manage it.'
Bob Valentine, Ph.D., is founder and president of GenieCo, Inc., which specializes in providing Intelligent Business Systems for individuals and small to large business owners.
Dr. Valentine has been breeding horses since 1971. He is a professor of Equine Business Management at Colorado State University. In addition, Dr. Valentine writes a monthly equine business column: "Mind Your Own Business: Think - plan - organize - execute - make/save money."
You can reach Dr. Valentine at 1.888.678.4364 or firstname.lastname@example.org. GenieCo, Inc. is a Colorado Corporation and a member of the Rocky Mountain Innovation Incubator (RMI2).