Identify the Profit or Loss
Many businesses do not have adequate systems for identifying the profitability of different products and services, or even by the business as a whole, yet this information is absolutely essential if the business is to grow.
It is also important to know the costs of different areas of administration, to control overheads.
To keep track of profits and costs, a business needs to have a management information system which can provide all the essential facts quickly and accurately.
Obtain timely information
Annual accounts are not enough to control a business. A business must monitor profitability on a regular basis. Most businesses need to produce operating statements at quarterly s or, better still, at monthly intervals. Some businesses keep financial information in real time.
Set financial objectives
Businesses need to prepare annual budgets and update them with forecasts so that they can set realistic financial targets, control finances and account to key stakeholders for variances from plan.
Key Performance Indicators (KPIs)
KPIs are the information you decide you must have to monitor progress and to run your business. The usual KPIs are:
Sales – monitor the trends in sales on a daily, weekly and monthly basis, in as much detail as possible.
Costs – the business’s gross margin is a key sector comparator. There are ways to establish the sector figures to check progress against competitors. Overheads (such as rent, heat and light and insurance) are usually fixed so monitoring them presents fewer problems.
Working Capital – trade debtors (money owed by customers) should be closely monitored. The aged debtor analysis should be kept up-to-date.
Cash flow –cash in and out should be monitored. The advent of telephone and internet banking means a business should know its bank balance every day and the cash flow forecast updated.
There a many accounting software packages which can provide regular information. Many will extend beyond management accounts to analysis of debtors and can provide KPIs at the push of a button.
How do I get more support?
Register for X-Forces’ start-up and business planning support today through our website, www.x-forces.com or by telephone.
Help for businesses can be obtained from ICAEW’s Business Advice Service. This is a free straightforward discussion with an ICAEW Chartered Accountant. Further information can be found at www.businessadviceservice.com
Article by Clive Lewis, ICAEW in conjunction with X-Forces.