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 Just as someone goes to a doctor who is an expert in issues relating to health, a business person should seek the regular advice of an accountant on financial health and other issues relating to their business. In addition to getting expert advice, this also has the benefit of seeing someone outside the business who is not constrained by its day-to-day activities, and who can therefore be objective.
While a properly prepared financial statement is one of the best means of communicating financial information, it is certainly not the only one. Indeed, they have one disadvantage—they show the results of business after the event, and as such they are a lag indicator. If statements are prepared only on an annual basis (and this often happens well after the end of the year) there is a considerable lag, and so more frequent reporting periods are needed for more important data. It will also help to look at other financial and non-financial indicators, such as the number of inquiries and customers per day, average sales value, number of quoted jobs lost, and customer satisfaction.
For best results, financial statements and other performance indicators should be prepared on a regular and consistent basis. Monitoring performance using successive monthly or quarterly accounts/figures can show trends that otherwise might not be apparent.
The following is a guide for areas needing regular check-ups. Make note of any issues and possible actions to help with future planning.
Operating Result
The first and most obvious area to monitor is the profit or loss. Many businesses also monitor the gross profit and gross profit percentage. The profit can be measured either on a cash or accruals basis and should include a charge for depreciation of fixed assets. Variances in expenses or budget from month to month give indications of potential issues that should be investigated.
The level of selling costs compared to sales can give an indication of inefficient sales persons or inefficient sales channels. This also applies to administration costs.
Debtors & Stock
It is imperative to keep debtors to a minimum. Monitoring debts saves on financing costs as well as reducing the risk of bad debts. Review the level and age of debts each month. Significant debtors outstanding beyond 90 days should be individually reported. The number of days sales are outstanding should be monitored as a measure of efficiency of collection and used as a benchmark for improvement.
Maintaining stock or inventory records on computer helps businesses monitor the level and monetary worth of stock and highlights slow-moving stock. Stock with limited movement should be reviewed every six months and a positive decision taken to either dispose of or maintain it for some strategic reason. Many business owners can be possessive about their stock, so outside advice is very useful here!
Even if a business only conducts a formal stocktake annually, the number of times the stock is turning over each year, a vital measure of business performance, can still be calculated.
As an indication of the savings made from reducing the absolute levels of debtors and stock, take an example of a business with $5,000,000 turnover. If they have debtors and inventory of $600,000 and $500,000 respectively and can reduce each of these by 20%—that is $220,000—there is a minimum interest saving of $16,000 each year.
Finance Issues
A successful business is usually a growing business and requires increasing investment in working capital to fund stock and debtors. This can be funded out of profits by an increase in retained earnings or by bank or other institutional finance. A well run business should have the right balance of retained earnings and external finance. Bank finance rates range from 7 to 9 percent, and retained earnings should be returning a minimum of 15 percent on the investment in the business.
The rate charged by a bank varies according to the security offered. Monitor security levels and negotiate rates periodically with the bank. Sometimes, as a business grows, there is a need for a different, more long-term type of finance. This may be at a cheaper rate than for a short-term, fully used overdraft. Bank balances should be monitored to compare time spent in overdraft and when there is cash in the bank. Sometimes excess money can be placed on short-term deposit.
Tax Compliance
Many business unwittingly breach tax compliance levels. Taxes such as state payroll taxes are invoked at certain levels of salaries, wages and other employee remunerations. Other taxes need to be paid more frequently as the size of the business grows. Superannuation compliance is increasingly complex. An expert can quickly ascertain whether or not the laws are being complied with.
Just like a doctor with a sick person, an accountant can intuitively look at financial information and help prescribe appropriate and timely remedies. But it is up to the business owner to take the step of seeking help, and then assist with the recovery by taking the medicine or making the necessary changes.
Adapted by DSB Magazine www.dsbmag.com.au
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