This month, Jack Posner (principal) and Darren Stone (manager) of Leon and Company Chartered Accountants in Leeds write about how to use accounts to improve business results.
As we write, a snap general election looms. With the uncertainty of Brexit on the horizon, we all need to consider if our respective businesses are as good as they can be to ‘weather any potential storms’, or benefit from any opportunities arising.
All business owners can step back and take stock. Your business’s accounts tell a story which if understood allows you to bring about improvement and steer it in the ‘right’ direction.
For example, take your most recent accounts and compare the income with that of the previous year. By comparing the two figures, you can quantify how much your business has grown (or shrunk) since last year. You should quickly be able to deduce why this is; e.g. a change in the mix of your products or services.
Further exercises can be carried out, like looking at how much of your sales income is converted into profit – this is known as the gross profit margin. A high percentage shows that you are enjoying a good return on the direct costs (e.g. stock) of producing the goods. Moreover, by comparing it to the margin in the previous year, you can deduce if you are increasing or reducing your profitability over time. To increase it you may need to negotiate a better deal on your purchases, or even review your own pricing strategy, i.e. put your prices up.
So, you might have excellent gross profit margins, but when you come down to the bottom line, you might be surprised to find this profit is eroded by the general, fixed overheads of your business. This means either your overheads are too high, or you just need to sell more of the same. This could be addressed by scaling up your business output (e.g. could you invest in more staff or machines to enable more sales?) or review your marketing-mix (to drive more sales). Combining this with reviewing your fixed costs can help to boost this bottom line.
Clearly this is only a flavour of what is possible. But this demonstrates one way we can all make informed decisions for the future, and should go some way to adding some certainty at a somewhat, uncertain time.