The availability of your annual financials is a wonderful opportunity to review your business performance. You can discover how to improve your business as well as refresh your enthusiasm and drive in the business.
Here are seven ways you can use your annual financials to improve your business.
Your sales figure is a veritable goldmine of information about your business. The increase or decrease over the previous year doesn’t tell you much, so drill down further and work out the reason for the change.
For example, your sales may have increased because you cut your prices, but you may be no better off. Say your gross profit margin is 35 percent and you reduce your prices by 10 percent; your turnover has to increase by 40 percent just to maintain profit levels.
A simple yet effective profitability benchmark is your average dollar sale, which is always easy to calculate — just divide your total sales by the number of transactions. Calculate this now and compare it with the average dollar sale from a year ago. Set yourself a target to increase this by 10 percent in a year’s time — it’ll do wonders for your profitability!
2. Gross profit
Has your gross profit percentage gone up or down?
If it’s gone up that’s marvellous, but has it gone up enough to cover increased outgoings? When was the last time you increased your prices? Can you specialise in a niche area which will enable you to increase your prices further?
Pricing in the business world is much misunderstood, and many business owners are leaving money on the table, mistakenly thinking that the odd complaint means they have to take a very conservative view with pricing. Increasing your prices can be a great way of weeding out customers who no longer fit your business. Be bold!
Review your overheads for an increase or decrease.
If they have increased, was this a planned increase to enable you to expand your business, or are they out of control? Can you reduce any of your overheads without detrimentally affecting your business?
It’s normally difficult to reduce your overheads by more than about 5 percent, which means you will be better off focusing on your sales and gross profit where the potential for increase is theoretically unlimited.
4. Breakeven point
The availability of your annual financials is an opportunity to update your breakeven point, which is arguably the most important thing you need to know about your business.
If you know what cash you need to collect from your customers to cover your outgoings in a week or month, it’s a truly motivating factor and a very early indicator of impending success or failure. I say outgoings rather than overheads or expenses because you need to factor in your drawings or tax as well as overheads when calculating your breakeven point.
5. Cash flow statement
If your annual financials include a cash flow statement, use it to identify where all your cash has gone.
It’s not unusual for clients to say to me that the accounts we have prepared are rubbish because they show a large profit despite no money in the bank. Your cash flow statement will show in summary sources of funds and how they have been applied, which is essential because many of the outgoings of a business will not appear in the profit and loss account (for example, drawings, tax or loan repayments).
Is your business solvent or insolvent?
Examine your assets versus your liabilities, especially your current assets and liabilities, like cash in the bank, accounts receivable and short-term debt.
Can you pay your bills as they fall due, or are you dependent upon the goodwill of suppliers to continue to trade? As directors of trading businesses, we have a legal duty not to take on debt we cannot repay. If our annual financials show an insolvent position, we are placing ourselves at risk of disqualification from directorship and financial ruin if we trade on.
7. Advance/current account
How much money does the business owe you, or do you owe money back to the business? If the business owes you a substantial sum, perhaps it is time to start drawing this money down.
Or maybe it’s time to restructure your finances and replace your advance account with a business loan. This will enable you to withdraw the money you are owed and repay your home mortgage, therefore creating an ongoing substantial tax deduction. If you owe money back to the business, you need to repay this as soon as possible to avoid additional tax if your business goes bust.
So don’t just think about your annual financials as unwelcome cost; they are in fact an investment in the future of your business and key to your financial wellbeing.