On Accounts

Time for a business health check
For the majority of business owners, April 1st is the beginning of the new financial year and it’s a great time to review the business. Amanda Watt shows how.
To review your business, first ask yourself what you should be doing to ensure it is in the best health. Ask ‘Am I getting the right information?’ ‘Am I looking at the right information regularly enough?’ If you cannot confidently answer ‘yes’ to both questions, you may want to review your accounting system. April 1st is the perfect time to change accounting systems – if that’s what your business requires.
The other areas to focus on are: Sales/Revenue; Cost Control/Overheads; and Cashflow. At a bare minimum you should receive a monthly Profit and Loss statement and Balance Sheet.

Sales/Revenue
Every month look at your sales. Have you achieved your budgeted sales? Have the sales increased or decreased for the month? A good accounting system should compare your sales to the same month last year, and to your budgeted sales.
If there are any issues it means you can react and rectify sooner rather than later. Why didn’t you achieve your budgeted sales? How can you increase sales? You may have exceeded your budgeted sales – if so, look at why and what you can do to continue increasing your sales.

Cost Control, including overhead management
Focus on your major costs, including your direct costs. On a monthly basis how is your gross profit margin tracking? Are you maintaining your margin? If your gross profit margin decreases, this can be due to a range of things. Your direct costs could have increased, exchange rates may have had an impact, or your processes could be inefficient.
Review your major overhead costs and ensure these are kept under control. What areas could you reduce costs in without affecting the quality of your services or products? Look at all your expenses in ascending order – focus on the expenses that will make the biggest impact. You should also be tracking and eliminating waste, as well as involving your employees –they are just as concerned as you now that unemployment is on the rise.
Ask for discounts, but be wary of giving discounts to others as this can cost you more than its worth. For example, if you provide a 10 percent discount, where you have a 25 percent margin, you need to increase your sales by 67 percent just to make the same gross profit!  
As always it’s better to focus on growing revenue than cutting costs, and all cost cutting needs to be weighed up against whether it will affect your revenue and/or the future of your business. Speak to your accountant before taking action.

Cashflow
Cashflow is very important. Your monthly balance sheet shows a snapshot of what is in the bank, not what your cash will be next month. Ideally you should be preparing a cashflow/budget for your business. Having an up-to-date cashflow shows where there are likely to be cashflow shortages, and provides information both to yourself and your financiers. Common problems people have when preparing cashflows include: only focusing on short-term goals; not involving all staff; having an inaccurate starting point and using ‘across the board’ cost cutting strategies.
For most businesses cash is tied up in their debtors. What are your debtors days? Debtors days are increasing and traditionally, the longer it takes a debtor to pay, the more chance that they may not pay and this could turn into a bad debt. Someone in your business must focus on collecting your debtors and ensure that your debtors days do not get out of control. It is one thing to make the sales, another thing to ensure you get paid; both are as equally important. Cashflow can also be tied up in inventory so it’s a good idea to check your inventory days as well.

Amanda Watt is a business advisory principal at WHK Auckland. The views expressed in this article are her own.