Take Control of Your Business!

In my last blog post, I discussed the pressures faced by small businesses and how these pressures can ultimately wrest control from you of your business and, because what’s going in in your business impacts your finances and home relationships, in some cases your life. In this article, I will look at how you can start to regain that power.

The first step to being in control is regular, timely and accurate financial reports. Are you getting the information you need from your accountant, and do you understand it?

There are normally three to five critical numbers that drive a business. It is crucial for you, as a business owner, to be on top of these numbers and to understand them extremely well to be in control and make the most of your available opportunities.

Here are some of the critical numbers you should be all over like a rash:

Sales: What sales have been made today, this week, or this month?
Gross Margins: What gross margin have I made on my sales?
Overheads: What are my monthly overheads?
Costs: Which costs go into cost of sales and which go into overheads?
Break-even point: What is my break-even point?
Accounts Receivable: Who owes me money and when can I expect to get paid?
Accounts Payable: Who do I owe money to and when?
Capital: What are the working capital needs of this business?
Liquidity: What is my liquidity position?
Profit and Cash Flow Forecasts: How much profit do I expect to make in the next 3-12 months and when will those profits flow into cash?

Whenever we’ve been involved with businesses in trouble, there has been an extremely high correlation between those businesses and those that have no idea of their financial position. Understanding and managing these numbers is critical to your survival and prosperity.

Your accounting function

You may need to take a deeper look at your accounting function. Do you get regular reports? Are they accurate? Are they on time? Do they show you what you want to see and do you understand them?

Whilst I see it all the time, I find it hard to understand how you can manage and control a business without monthly management accounts. I guess it’s possible for very small and stable businesses to make do with reports every quarter when the VAT return is done. However, for any significant business, particularly one that is growing or is in a stress situation; monthly management accounts are critical.

A proper set of monthly management accounts will include several statements:

Profit and Loss

Firstly, a P&L is needed for the month. It should also report profit and loss over previous months so that you can see the trends of what’s going on.

Balance Sheet

Although less well understood, a monthly Balance Sheet is also a critical piece of the jigsaw. It let’s you know your Assets, (what you have), less your Liabilities (what you owe) which sums to your Net Assets/Equity (what you own).

Aged Receivables and Payables

These provide detail of balances on your Balance Sheet showing you who owes you money and who you owe money to. The ageing of those amounts helps you see how up to date you are and particularly where to focus your efforts at collecting cash. Be careful not to count on Receivables which you’re not sure you will get, chase these and provide against them if required.

Other key information

Further information which may be key for you to have a full picture are:

An analysis of any particularly significant numbers from the P&L – e.g. sales by client, profit by job
Key balances on the Balance sheet e.g. Director’s Loan Account
Variances against budget and the reasons for that
An updated P&L and Cash Flow forecast which reflects your latest results in its opening position
A KPI Dashboard for key results and drivers to be monitored and managed

Information is power

Looking at these statements on a monthly basis will help you to be on top of the questions above. Whilst at first site it may seem like a lot to take in if you’re not used to it, once you’ve seen them over a few months they will really help you focus on things that are really critical in your business.

It is vital to make sure you have a solid understanding of all these numbers. Your accountant should not be talking down at you, but rather helping you interpret those numbers, educating you and figuring out what to do about them.