The importance of measuring the business
Most new clients do not understand why up-to-date accounts are crucial to running a successful business! A significant proportion provide similar responses when I start to investigate their bookkeeping and accounting methodology. Typically, they tell me that they hand over receipts to their bookkeeper and once a year the accounts are resolved and forwarded to HMRC, usually at the last minute. Others tell me their bookkeeper has provided an excel sheet and they fill it in when they have time.
This usually means that their accounts are potentially 17 months old by the time they review their results. They are preparing their accounts for HMRC and tax purposes, and not in order to manage their company. They do not realise how useful tool accounts are when kept up-to-date, and how trends can be spotted, costs reduced, and profits increased if only they were reviewed in good time. Comparing this quarter to last, this season to the previous years’ season, can help us learn more about the business.
Instead, they will be signing accounts that contain information on what the business earned over a year ago! Most can’t tell the difference between cashflow and profit and loss. They believe that as long as there is money in the bank, they have made a profit. This simply may not be true. A business owner cannot possibly tell how profitable his/her business is, without accurate and timely accounts, because often they do not know their true costs and what they owe at any given time.
This in turn means that they are managing businesses without knowing if it is profitable or not, which parts of it are more profitable than other parts, which parts are losing money, etc. What if your business isn’t profitable? Wouldn’t you want to know that and be able to make decisions in real-time about how to proceed, and deciding what needs changing?
Do you know what parts of your business are profitable?
Many businesses comprise a number of profit-making areas. Let’s look at a chain of cafes, for example. Their lunch menu may be less profitable than their dinner menu due to their ‘business lunches’ or lunch deals.
Supermarkets make more money selling artisan products than staple goods, however, they need to stock the staples to ensure their clients do not shop elsewhere for them. Footfall is king – the more people visit the store, the more chance they have of sales.
By keeping up-to-date accounts and reviewing them periodically (daily, weekly, monthly, quarterly, annually) different patterns will emerge. For example, you may discover that certain days of the week, or times of day, are busier than others, and/or that between 2pm and 4.30pm there is very little business during the week. January may be your worst month, and the summer months may be your best. Having this information at your fingertips may well lead to changes in your marketing and promotions, targettingcertain times of day, week, month or season.
You may decide to sell a product below cost (i.e. a ‘loss-leader’), knowing that by doing so you will be able to up-sell other items.
So, do you know which parts of your business are more profitable than others? Have you noticed if there is seasonality in your business? Are there times when you are busier than others? Was it the same last year and the year before? What changes can you make to counteract the slow periods?
Do you know which types of clients are timewasters and which truly appreciate your value-add and are more profitable?
If you had this knowledge, how could you use it? Aren’t you just itching to get your accounts up-to-date??
Knowing your numbers is key to running a successful, growing business, versus limping along or even failing.
Know your costs!
Surprisingly, many clients do not know the total cost of what they are selling. This is often the case for service-led businesses. For example, I worked with a software development company for the duration of a year. During our initial sessions I noticed that the staff person who created the quotes for development work was not the project manager.
As you may expect, the project manager’s team comprised junior and senior developers, which meant that there were differences in the team members’ costs per hour.
There were no controls in place, and no-one thought to compare the quote to the actual costs during or even after the project ended. Indeed, the time invested by each staff person wasn’t measured. This meant that they didn’t know the actual costs of the project and therefore couldn’t use that information in the future, when similar projects were being quoted.
It was clear that the business could be losing money on any given project and if the project was of significant duration, the risk of costs overrunning profitability were increased.
The fact is, they didn’t know either way.
When your accounts are up to date and you have access to the software (note I wrote ‘software’ and I don’t mean excel sheets!), you will be able to generate reports at the press of a button. You’ll be able to see profit and loss by month, quarter, current year and fiscal year. You will be able to see who hasn’t paid their invoice on time, which clients habitually pay late, if at all, which clients are spending more than others. Which clients are more profible than others, etc.
You could separate clients by type if you created categories for your various revenue sources. You could see which parts of the business are more profitable than others. You may even decide, based on your figures, to close down certain parts of your business, and to invest in other, growing areas of your business.
No less importantly, you could even review your costs and this could lead to switching suppliers, renegotiating contracts, and ultimately, saving costs.
Saving costs means more profit!
I do hope I have made a case for ensuring your books are up to date and if so, how the information can be used as a managerial tool rather than for checking what you owe Her Majesty’s Revenue & Customs. There is much more to your accounts than paying tax!
Have I helped you to see that? Need help to see what your figures are telling you? Dissecting your accounts could lead to changing your business, making it more efficient, and far more profitable. If you would like advice in this area – call us! We would be delighted to help.
About the author
Lesley Anne Rubenstein-Pessok, MD of LAR Consultancy Ltd, has spent her whole career in executive roles, working with and training start-ups and SME businesses, helping them to become more efficient, increase turnover, improve profitability, cost effectiveness and create strategies that pay off. She is an approved mentor for the London and Partners’ Business Growth Programme, as well as for other public funded programmes. Her client testimonials say it all.