As a business owner or manager, knowing your numbers is fundamental to success! I cannot emphasise the importance of this enough! Being unaware of the key figures like sales, expenses, overheads and the profit you’re hopefully making is like trying to run a marathon blindfolded. You won’t know where you are, where you’re supposed to be going and whether you have the energy to get there!
They say knowledge is power and this is never truer than when running a business. Remember there is no standing still; you’ll have to work hard even to stay in the same position year on year. If not your competitors will jump in, you’ll contract and go backwards.
To grow requires even more effort and extremely tight controls over the finances.
So let me go through the four steps to getting these numbers in order.
Step 1 – Process the Bookkeeping
This is the absolute bedrock of the chain! Without the completed bookkeeping each month you have no chance of completing the other three steps! How can you see the performance of the business and work out the required changes for increased profits without knowing the current situation?
How can you see that you’re spending too much on marketing without the data to back up the assumptions? Otherwise you’re guessing and working blindfolded again.
Good bookkeeping, done on time and processed in a way where you can read the reporting easily and in a way that is relevant to the business is key to growth. Not only this, you will know who owes you money, who you money to and how much you turned over in the last month.
Cash flow is a major factor when running any organisation. If you have no idea of your regular outgoings, or the pipeline of sales due in, when the VAT bill is due and so on you’ll spend when you shouldn’t and run out of reserves.
Planning is key based on the bookkeeping numbers and the bookkeeping is the foundation task that allows everything else to work.
Step 2 – Run the Management Reports
Once the bookkeeping is completed then the really interesting work can begin! It’s a little bit like being a forensic detective, looking for clues, information and proof.
Management reports or a Profit and Loss report run straight from your bookkeeping software will paint a picture of how your business is performing. Numbers can tell stories too and if you look closely you’ll begin to detect patterns both similar and irregular.
You’ll see trends on your sales lines, which always appear at the top of the report. If you’re a seasonal business you should be able to correlate the busy times of year with the high trading months. This will help you plan for the slower times and ensure the profits made in the good part can be saved to cover the slower times.
You’ll also see patterns building with your expenses. Usually things like rent and communications tend to be similar. So if something is out of kilter you should be able to spot it straight away. This then leads to questioning the numbers and where to look for more in depth information.
Finally you’re looking at your profits or in the worst cases a loss. A lot of people we work with get very frightened at this stage, even to see the numbers.
Are there any profits? If not why not? What happened in that month to cause the expenses to be higher than the income? Were you expecting it to be that way or has something gone astray? None of these questions are critical, they are pointers to trigger the research. Find the facts and make decisions based on them.
If something has gone wrong, the sooner you make the relevant changes the better. Some people will put their head in the sand and hope for better next month. While this may be a short-term coping strategy, what's required for the long term approach is to make changes now. Where did we overspend? Then keep going until you find the reason why the numbers look the way they do. Are there changes that need to be made now? Make them! You won’t always see the results straight away but it’s best to get going as soon as you can.
This is why running regular management reports is so important. It’s no use waiting for your year end accounts six months after the year has finished only to find out you made a massive loss and must do better next year. It’s a little too late. To correct errors made in the month just finished is a lot easier to do. Strike while the iron is hot!
Step 3 - Bring your Accountant in
A good accountant is invaluable to your business. We’re very lucky to work with great accountants at Athena Business Services and can recommend with confidence those who will serve you best from our experience.
Having a good, tidy set of books to hand over at year end will make your accountants job a lot easier, quicker and more efficient when it comes to your tax planning. The more time you have before your filing deadline the better.
Step 4 – Plan for the Future
By following steps 1-3, knowing your numbers and running a highly profitable business will allow you to plan for the future of the company and your own personal future too. This is where a good Financial Advisor will assist with pension contributions, key person cover and so on to ensure that both you and the business are looked after for your retirement and should the worst happen unexpectedly.
We are lucky to work alongside a fabulous Financial Advisor who offers straight forward, plain speaking advice which is easy to understand.
Your business numbers are the code to unlock a financially buoyant future! Do you know yours?