With the new financial year around the corner, it’s a great time for business owners/managers to consider the results for this year and what you want to achieve next year.
There is an old saying: “If you aim at nothing you will hit the target with amazing accuracy.” If you want to improve the results in your business, you need a target to aim for and a system for monitoring progress.
Here are a few questions to ask yourself at this time of year:
- How were your results against your target for this year?
- Did you have a target for this year?
- Are you happy with the results for this year?
- How accurate are the results for this year?
- What do you want to achieve next year?
- What can you learn from this year to improve next year’s results?
It can be difficult to find the time to consider these issues when you are busy running a business, but a small amount of time spent now can pay big dividends to your results next year.
Here are a few ‘key issues’ you need to consider and command:
- Compare results: Most businesses have lots of transactions happening and it can be difficult to keep track of it all. By having a budget (i.e. something to compare actual results against), you have a regular procedure for checking income and costs are on track. You can see very quickly if margins are slipping. Find out why and take corrective action.
- Identify over-spending: If you don’t have a monthly budget, you may not find out until way after the financial year (sometimes eighteen months later) that you have over-spent on some items. Imagine if you had a small number of items of over-spending that added up to say $1,000 per month. If you left it until tax accounts are prepared, it could cost you $18,000 in lost profits. With a monthly budget you can identify over-spending quickly and take action to fix it. A budget can be entered in to most accounting software systems and a ‘budget versus actual’ profit and loss can be printed so that you can easily see any variances and manage them.
- Spending limits: A budget lets your staff know there are limits on spending. It’s amazing how some staff will keep spending if they don’t have a limit.
- Resources: A budget helps you to plan what resources will be required to achieve the sales you plan. It’s important to match the outgoings with the income and plan what resources will be necessary, thus avoiding ‘Crisis Management’, which is no good for morale.
- Funding: If you want to acquire business funding, you will definitely be required to produce a budget and probably a business plan. A lending institution needs to be confident you have ‘thought through’ your business and funding requirements. If they can see that you regularly measure actual versus budgeted results, they will feel much more comfortable with you as a borrower.
- Break-even: Some people say, “It’s too hard to do a budget because I can’t predict what I will sell.” This should not be an excuse! Most businesses know what their direct costs and overheads are, so it should be possible to calculate the “Break-even” point. ‘Break-even’ means the level of income you need to cover costs and overheads (i.e. not making a profit or a loss but a $0 result). Once you can manage the business to a ‘break-even’ point, any sales above that are a bonus.
If you know how to do a spreadsheet, that’s a great start. You can set up as many rows as you like to contain various types of income, costs and overheads. You may need to start with the overheads, as these are generally the best known numbers.
Anything you can do to increase your net profit can have a big impact on the value of your business. As many businesses are valued on a multiple of EBIT (Earnings Before Interest and Tax), it makes sense to increase this result. Many businesses have been run in the past with the aim being to minimise tax, but this isn’t a good strategy if you want to sell your business in order to retire or do something else. Multiples of EBIT vary depending on the industry, but say it is three – this means that for every extra dollar you can add onto net profit, that would be three dollars added onto the value of the business. If you could increase your profit from $100,000 to $200,000 you would add an extra $300,000 onto the sale price and potential contribution into your superannuation fund on retirement or exit from the business.
If every business owner/manager spent a little time reviewing the profit and loss and all expenses, I’m sure they could find unnecessary spending, sometimes thousands of dollars each month.
It makes sense to invest a little time planning for the profit you want to make in your business and reap the increased business value benefits down the track.
Sue Hirst is a director of CAD Partners, a nation-wide mobile CFO “On-Call”/financial control/business accounting service for SME owners.
Photo: ArtemFinland (Flickr)