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Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Good Business is a numbers game

In our financial control business we deal with many small businesses and the news seems to be somewhat patchy. Some businesses are coping well with the ‘downturn’, whereas some seem to have folded quite quickly. There are businesses that are basically sound and others will survive despite themselves. The second category may be lucky enough to be in a recession-proof business i.e. not involved in discretionary spending or affected by the building industry, financial industry etc.

The strong businesses are those that are well-run and designed to withstand outside influences, or have factored in potential risks and have a plan to manage the situation. I heard of one business recently that had benefited greatly from the mining boom in WA of recent times - now their business has been hit by the radical and quick contraction in parts of the mining industry. The business owner was biting his nails, waiting for more orders to appear - which didn’t. This is not my idea of a well run business . My first questions would be what is he going to do about it, what alternatives are there to his traditional market, what else could he produce with the equipment he has invested in?

The key area where the owners of strong businesses focus attention is on the numbers. These astute business owners know:

Sales

• The trend in sales figures and what impacts them.

• Which products/services are profitable and which are not.

• Which sales people are producing the best results in sales as well as profit.

• Which jobs they made money on, which they lost money on and why.

• Personnel productivity in a service or job based business i.e. how many hours they sold compared to those they paid for.

• Which customers are contributing the most sales in profit

• Key performance indicators for their specific business e.g. sales – per salesperson, per square meter of retail space, per customer etc

• What to charge for their products and services in order to be profitable as well as competitive.

Costs and Overheads

• The true cost of their products and services and how they are trending

• The exact amount of overheads and a comparison to budget - this enables them to take very quick action if the variance is not in their favour.

Profitability

• The gross profit or contribution to profit of various product/service lines or divisions of the business

• Their gross profit percentage for the current month and year to date, as well as a comparison to previous periods. Some also compare against benchmarks for their industry

• Net profitability every month, i.e. what’s left each month and for the year to date after deducting costs and overheads from the sales figure. The costs and overheads need to be relative to the sales, i.e. if you sell some software in a month you need to deduct the cost in the same month

• Actual results compared to a budget of profit and loss, as well as a rolling forecast of actual results, compared to future projections, showing where they will be at the end of the year if projections are met, and

• Their “Break-even” point i.e. how much they need to sell to cover costs and overheads without making a loss or profit. 

Cash flow

• Their stock level and the amount required to meet near and long term needs

• The average stock turnover, i.e. how many days on average is stock sitting on the shelf waiting to be sold

• Their Work in Progress Level and the average number of days jobs are in progress until they are finished or invoiced

• The amounts outstanding to suppliers and the number of days on average they are taking to pay all suppliers

• The amounts owed by customers and the number of days on average customers are taking to pay (this can vary greatly from the actual credit terms given to customers!)

• The amount of tax due (GST/PAYG etc.) and if they will be able to pay it when due.

• Forward projection of cashflow i.e. the future monthly bank balance based on assumptions of customer receipts and all payments due.  In tough times, this may need to be known on a weekly and even a daily basis, and

• The dates when leases or lending facilities are due to end so they can plan for renewal or replacement. In some cases the biggest threat may be bankers tightening their requirements and not renewing or allowing the replacement of these credit facilities.  

This may seem like a lot of information, but most of it is available from off-the-shelf accounting software - if properly set up. Some may need to be prepared by a trained financial professional. Many business owners are good at what they do, but are not necessarily skilled in financial reporting. Astute business owners recognise the benefits of gathering a team of complementary skilled people around them from whom they seek counsel and support to fortify and grow their business.

Sue Hirst
My Business, March 2009

www.cadpartners.biz

 


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