If you are a small or medium business owner, you probably aren’t in meaningful regular contact with your accountant. Instead, your relationship is occasional, and any communication will be limited to your accountant providing the latest financial statements for your business. The balance sheet and profit and loss statements will be given a glance, but you won’t delve into them any more in-depth than you need to – that is the accountant’s job, and you are busy running your business. This is a common scenario that plagues small business. It may very well mean you lack the financial insights to steer your company in the right direction.
If you understand the importance of being on top of your finances in achieving business success, the first step to making a change is to develop an understanding of your financial statements. Once you have analysed the statements your accountant provides to the best of your ability, it is a great idea to set up a conversation with them to follow up with some key questions. Understanding these eight essential questions will go a long way in cementing your knowledge of your company’s financial position.
1. What is my gross profit margin? The gross profit margin is an important metric to measure how much profit you are making from each sale you make. Gross profit subtracts the cost of goods sold from your topline sales number. Dividing your gross profit by sales produces the gross profit margin. A higher margin is usually better as it indicates you are making more money per dollar of sales. Keep in mind that it does not take into account any other costs. However, it does give you a baseline metric to measure any efforts to boost your income.
2. What is the business’ breakeven point? One of the most important pieces of financial information you need to identify is your break-even point. This is the point where your business is not running at a loss, yet not turning a profit either. Ideally, you will always stay above this point (profitability). The first step to consistently being profitable is understanding where the break-even point is and then taking action to achieve, and then exceed it.
3. How can I boost my business’ cashflow? Cashflow is much more important than many business owners realise. Even if you achieve profitability, it does not mean you are in the clear. Unless you have the cash to meet your bills when they fall due, pay your staff when they’re owed or take advantage of growth opportunities when they arise then your business will not be able to achieve its full potential.
“Discuss your cashflow position – it’s more important than you realise”
Discuss your cashflow position with your accountant. If you have a lot of unpaid invoices on your books or a history of late-paying customers, you may need to make some changes. They might also recommend a service such as invoice financing to help unlock cash from your account receivable ledger.
4. What is our net profit, and what does that tell us? Once you understand your sales, gross profit margin and break-even point, diving deeper into your net profit figure numbers are useful. Net profit takes your revenue and subtracts all the other costs involved in running your business, including staff, rent and taxes. Net profit is a holistic measure to assess how economical your business is over a specified period. It’s a great tool to establish opportunities for improvement.
For example, if your gross profit margin is industry-leading, yet your net profit is negative, then it may be a sign you are carrying too many unnecessary operating expenses. The benchmark level of net profitability varies depending on your industry, so check this with your accountant also.
5. Which areas of the business are most profitable? If you have multiple products or service lines, you’ll know that some perform better than others. The products you generate the most revenue from are not necessarily the most profitable. Once you identify which areas of your business are the most profitable, you can begin to develop a plan to boost sales of the right products or services. The insights your accountant can deliver here may make a significant difference to the strategy and direction of your business.
6. I want to cut expenses, where should I cut? As we have seen recently, there will be times when we need to cut costs urgently. When this occurs, it can often be challenging to know where to prioritise. Your accountant will be able to give you insights into where you can save the most bang for buck. They will be able to benchmark your expenses to your competitors, helping you identify opportunities.
7. How long can we survive if things go bad (again)? In addition to cutting costs, it helps to know how well your business would be able to weather the storm. Will you still be profitable if sales were to fall 50% (or more)? Your accountant can help you identify financial risks and advise you of funding options that would be appropriate for your company, helping you find solutions to survive a tough period.
8. How am I doing compared to my competitors? If you want to compete effectively, you need to understand how you are performing relative to your competitors. If you are underperforming across multiple metrics, you need to investigate why – there is almost always an opportunity for improvement. Ask your accountant what they think you can do to catch up and move ahead of other businesses in your industry.
Once you understand your financial position, you’ll be better placed to take advantage of growth opportunities and take your business to the next level. Don’t let a lack of cash flow hold your business back.
Speak to me, your broker and let me assist you with any of your funding needs.
Message from CAtherine
Occasionally I come across an interesting article to do with Home Loans. I thought I'd share some of these with you here.