Updated July 5, 2023, Reading time about 7 minutes
This blog post focuses on operational management in small to medium-sized businesses (10–200 employees, up to $100 million income). It seeks to provide real-time, actionable insights from the work floor, enabling quick decision-making in today's dynamic business landscape. The 'cookie jar' analogy simplifies profitability tracking, making financial insights more accessible. This approach emphasizes the crucial role of ground-level workers in identifying inefficiencies and cost reduction.
Key Points:
- The common misconception that understanding how your business is operates necessitates complex calculations, can distort a company's perceived financial health.
- The wisdom of the “Cookie Jar” accounting principle used in the olden days: whose simplicity can help businesses cultivate profitability more quickly.
- The pitfalls of modern data collection and reporting.
- The importance of identifying your business's “cash cows” for a clear, view of where your profits are coming from.
A Novel Approach to Viewing Profit
Profit is often misunderstood, particularly when conventional approaches to tracking it distort our perception of a company's financial health. Even when a business appears profitable on paper, a single due bill without sufficient cash can jeopardize the entire operation.
For instance, in my role as director of food service and deli operations in a supermarket chain, I oversaw five fresh food kitchens and deli operations. The store managers were finding it tough to meet their gross margin targets each month, spending a few days correcting accounting errors in their profit and loss reports. But when I changed the tracking system from gross margins to dollar contributions, not only did profit increase, but it also reduced the time managers had to spend auditing reports. This shift allowed them to focus more on enhancing the customer experience.
Consider a manager I once worked with. He opened his own store, making satisfactory margins and demonstrating a solid income on paper. Yet, he lost his business due to insufficient cash to pay a supplier.
Another case was a medium-sized manufacturing company, so absorbed in cutting costs, that they gradually lost their customer base.
Finally, there was the store owner who was planning to replace an item with a very low margin, with something at a higher margin, until we looked at its total dollar contribution to profit. He was about to replace the fourth or fifth-largest contributor of real dollar profits, because of what he was seeing in a spreadsheet.
The Wisdom of Cookie Jar Accounting: An Age-Old, Yet Relevant Principle
In the past, farm wives used a simple accounting system: a cookie jar or a coffee tin. They would place income from selling farm produce or crafts into this jar, withdrawing money as needed to cover expenses. The goal was to end the month with more in the jar than there was at the beginning. Can't this principle be applicable to all business operations, including modern large-scale factories?
While the simplicity of a farmhouse cookie jar might seem out of place in today's fast-paced business world, it holds a timeless lesson: Don't Complicate Profit. Follow the Money. Ask yourself, how much money did you manage to keep in your 'Cookie Jar' today?
The Misconception of Profit Complexity and the Power of Simplicity
Many believe that figuring out your profit requires complex calculations, spreadsheets, and financial jargon. However, using the cookie jar analogy can simplify this understanding and offer managers a clear insight into where their real earnings are coming from.
If you focus on the business as a whole, rather than getting lost in the intricacies of each product and expense, understanding how well you are making money can be much simpler.
NOTE: The analogy isn't perfect because it doesn't account for inventory or capital goods and investments. For how a simplified approach fits into a more comprehensive and actionable understanding of how well your business is retaining the money earned from sales, we invite you to look at our IDW Method ™ Rapid Earnings Workshop. The workshop shows you how to look at all the variables to see how you are doing in a straightforward visual representation we call the TIO dashboard. But what we are calling Cookie Jar Accounting is the first step: a practical way to understand the cash-generating side of the business: operations. For more information on the pitfalls of modern data collection and analysis for business, read: Solving the Profit Riddle
What Matters:
To simplify your path to profit, start by identifying your “cash cows”—your biggest earners.
So, how do you identify your “biggest earners”? Auditing your revenue streams, by switching from a sales report to a Throughput Earnings report, can offer a clear, simplified picture of where your profits are coming from over time. This is covered in depth, with mentors to help you, in our IDW Method ™ Rapid Earnings Workshop as well.
Remember, what truly drives profit dollars in your business might not always be your bestsellers.
Case Study: The Impact of Simplifying Profit
A manufacturing client who attended our IDW Method™ Rapid Earnings Workshop was struggling to turn a profit. When they started 'following the money', they identified their real money-makers and refocused their efforts, resulting in a significant increase in profitability.
How did he identify his biggest earners? The workshop taught him how to take his existing data and arrange it in a way that focuses on the total profit dollar contribution of each item, rather than their sales volume or gross margin. He then sorted by largest contributors to smallest. It was obvious.
(For More Cases, click here)
Simplify to Earn More
Profitability doesn't have to be complex. Embrace the wisdom of the cookie jar and concentrate on the tangible aspects of your operations. Percentages and allocated costs may have a place in your spreadsheets, but they can cloud the reality of your day-to-day operations.
¨Costs do not exist to be calculated. Costs exist to be reduced. So, the important issue is to try various methods to see which ones reduce costs and which ones do not reduce costs.¨ Taiichi Ohno, Workplace Management, Gemba Press, 1982 Page 20
Ohno also said that only the workers can reduce costs, by improving how they do things. Not the accountants, nor the managers, nor someone at a desk looking at a computer screen. Improvement can only happen where the work is done, and happens only when those who do the work are involved directly in improving it.
By embracing simplicity, you might discover potential in your business you never knew existed. Profitability is simpler than you think – it starts with knowing what's in the cookie jar at the end of the day. Consider attending our upcoming IDW Method™ workshop on Rapid Earnings and let us help you simplify your path to earning more and achieve sustainable growth.
Click here.
Be the Devil's Advocate
After reading this:
1. Does it make sense to you that conventional methods of tracking profit can give a distorted view of operations?
2. Does it seem plausible that focusing on the dollar contributions rather than gross margins can help you increase profit and save time?
3. Does the concept of "Cookie Jar" accounting, which simplifies profit tracking, make sense to you in everyday business terms?
4. Are you convinced that identifying your cash cows can help?
Share what you think in the comments.