Make Sure You Know How Much Profit You Are Making
Many small business do not have adequate systems for identifying the amounts of profit or losses generated by different products and services, or even by the business as a whole, yet this information is absolutely essential if you want you business to grow.
It is also important to know the costs of different areas of administration, so that overheads are not allowed to swallow the profits made from gross margins.
To keep track of where profits and costs are coming from, you may need to have a properly designed management information system which can provide all the essential facts quickly and accurately.
Annual accounts are not enough to control a business.
You must know what is happening to profits and losses on a much more regular basis. Most businesses need to produce operating statements at quarterly intervals at least and, better still, at monthly intervals.
One of the best tools to monitor what’s going on and to aid decision making is to use Key Performance Indicators or KPI’s where you focus on a few key indicators in your business rather than look at the mass of financial data that’s produced.
They fall into three main areas Sales, Costs and Working Capital and reflect the performance and progress of your business and:
• Are measurable.
• Can be compared to a standard, such as a budget or last year’s figures and even competitor KPI’s
• Can be acted upon
To get the best KPI’s a business has to identify the key Business Drivers for their business. I have not got time to go into details here but I give a couple of examples.
1. The profitability and cash flow of house builders is greatly affected by housing prices and sales activity levels. These in turn are affected by local demand and supply, and interest rates. But it is all too easy for a house builder to ignore these key drivers. There will always be sites which are running over budget and other distractions. Suddenly, the house builder may find that while he was busy building houses, the market has significantly declined
2. For a food processing company cost drivers are inevitably going to be direct labour costs and yield (Both have a major impact on the gross margin)
In summary if you do not have relevant and useful up to date management information
You have no reliable information to base decisions and so will not be able to grow your business.
You pay unnecessary fees to your accountant.
You cannot supply information to your bank, mortgage lender, investors etc. when they need it
There are many good cost effective off the shelf solution. We offer our clients the licence to use cloud or online accounting FREE as part of our packages.
We can help you select the right package
Train you in how to use it
Set up a regular reporting system to provide the vital information you need to make decisions
With a little training and guidance you will make better decisions that will inevitably aid your growth plans. It will save you time and money in the long run and is essential if you want to take your business to the next level
Paul Stankiewicz is the owner and principal at Paul Marks & Co Chartered Accountants which is the trading name of Paul Marks Ltd a Limited Company registered in England and Wales (registered number 4487645). This article is designed for the information of readers only and readers should not act on any of the information contained in this article without seeking professional advice. Nothing in this article constitutes advice, nor does the transmission, downloading or sending of any information or the Material create any contractual relationship. Links to third party websites are provided as a convenience to the reader, Paul Marks Ltd does not control and is not responsible for any of those websites or their content.Paul Stankiewicz and Paul Marks Ltd accepts no liability or responsibility whatsoever for any loss or damage suffered by any user of the information contained on or accessed through this article or the Material downloaded.