In my travels I continually come across people who have little or no understanding of how their business is performing financially. There sole aim is to get paid and have money in the bank. They may (or may not) know the sales numbers but they don’t know their overall profitability or which of their customers are making (or losing) them money. They rely on their accountants to crunch the numbers but really the accountant is simply producing the BAS and doing the year-end tax return.
In my view every business should be producing a simple profit & loss each month to track how they are performing. It will highlight many areas of improvement that simply looking at your bank balance won’t do. For example, poor payers (you haven’t sold anything until it is paid for) work in progress (work not yet billed) or too much inventory (tying up your valuable cash). Expenses too high. It will also highlight if you are making money or not and (hopefully) motivate you to address these problems.
You don’t have to spend a lot of time or effort reviewing these numbers, but it is worth your time and effort. One of my customers recently moved from producing quarterly to monthly numbers and magically sales increased by 20%. When I asked why I was told “we can see our performance quicker and then do something to address the shortfall in sales. We are now better able to fill our spare capacity”.
As part of my coaching process I like to include a review of the Profit and Loss at least quarterly but preferable monthly. When reviewing the financials of a recent customer the results were interesting. They had never realised how much wages were costing them and had never put a process in to monitor it closely. They believed that they could reduce wages but “at least” 10% without much effort. Their turnover was in excess of $10 million and wages were 40% of their costs. They were therefore leaving $400,000 per year on the table. I’m sure every business would like to earn an additional $400,000.
Another customer used to complain regularly that they wanted to retire but needed to pay off their mortgage first. When reviewing the Financial Reports this customer had very high debtors. On further investigation there was significant money overdue by more than 90 days. The Business Owner had no idea, “my bookkeeper looks after that” they said. The bookkeeper did not like calling overdue accounts so had stopped. He could have retired he just needed to collect his debtors.
Producing regular financial results and reviewing them against your targets can certainly help drive your business forward. Don’t forget to produce them and make the appropriate changes to your business.