6 Ways to Increase Your Profits Using Accounting Software
Has your accountant told you not to use MYOB or any other useful accounting software? Reflect a minute or two and ask yourself why? Do you they have their interests at heart or yours?
Modern, powerful accounting software can transform a business, systemising procedures, saving time, increasing efficiency, and assist and show business owners how to increase both profitability and business sale value. In particular, in these challenging times, the more detailed and up-to-date information you have access to, the better you will be able to manage your business and react quicker to changing circumstances.
1 – Gross Profit Margin Analysis
Just being aware of your overall gross profit margin is not enough in business. It’s true some business owners don’t even know what theirs is, but why join them in mediocrity?
To know how to increase your gross profit margin you must drill down into your gross profit figure and find out which service lines and products are making you money and those which are not. Whilst you can look at individual sales, if your sales volume is high the best way to analyse your gross margins is across different service lines, product categories, departments or suppliers. You can then focus on the service lines or products which are making you the most profit and stop selling (or increase the price or change suppliers) those returning a gross profit beneath your overall target gross profit. Even if you mark up all your products at the same margin there will normally be different gross profit margins in practice resulting from discounting or clearance sales.
Before accounting software was widely available calculating gross profit margins in this way was a difficult task, normally involving selecting a few product lines on a test basis. With the former, you can report on gross profit margins earned across different service lines or product categories, departments or suppliers in seconds.
2 – Three Ways to Grow a Business
There are only three ways to grow your business:
- Increase the number of customers
- Increase the average $ sale
- Increase the number of times customers return and buy again
If this is the first time you’ve heard about the three ways, think about your turnover and how this comes about. Say you have 200 customers who spend, on average, $100 every time they buy and they shop with you weekly. Your turnover would be easy to calculate by multiplying 200 x $100 x 52. If you can increase each by 10% i.e. you get 20 more customers, the average $ sale increases to $110 and your customers shop from you 57 times a year your turnover actually increases by 33%, not 10%!
As you cannot improve what cannot measure the first thing you need to be able to do to grow your business using the three ways is to find out where you are now by determining the number of customers, your average $ sale and how many times your customers buy from you in a year.
With accounting software you can find this information very easily although, depending upon your business, you may need to find out the number of your customers by using other methods (such as door counters or a loyalty club) if for example, you’re a retailer. Then, and only then, can you test and measure the success of the strategies you introduce to increase the number of customers, improve your average $ sale and get your customers to come back more often.
3 – Break-Even Point Analysis
Unfortunately very few business owners know what their break-even point is. So simple to calculate – yet absolutely vital to business success. If you know what your break-even point is you can tell on a daily, weekly or monthly basis whether you’re selling enough to cover all your outgoing and drawings. If you’re not, you at least know you have to do better or cut your cloth accordingly, whether that’s reducing your outgoings or cutting your drawings.
Even for those business owners who do monitor their break-even point, those with poor systems use current turnover only to check their break-even point, assuming their historical gross profit margin and overheads (which are probably both completely out of date) are unchanged. With accounting software incorporating inventory control, accounts payable and a full general ledger you can track not just your turnover but your up-to-date gross profit margin and overheads meaning that your break-even point analysis is 100% accurate and totally up-to-date.
4 – Inventory Control
Many businesses have huge amounts of inventory on hand, often several hundred thousand dollars worth (especially at sale value) yet only know once a year precisely what quantities of stock they hold and what it cost them. How crazy is that?
If you have accounting software with inventory control you can identify obsolete or slow moving stocks at will, reduce inventory to the optimum level freeing up cash and space, stock the right products at the right time, prevent theft and staff pilferage, and most importantly track what’s in stock, what’s on order and what you’ve committed to sell to customers.
5 – Monthly Financials
Let’s face it – the traditional year-end financials prepared up to a year after your year-end are useful to no-one but the IRD and no one but accountants understand or value them anyway. Why then live on in blissful ignorance of whether you’re making or losing money and ultimately heading for success or financial ruin?
In addition, there is a very strong correlation between the frequency of financial reporting and business survival*:
Monthly reporting 80% survival rate Annual reporting 36% survival rate
If you can reconcile your bank, preparing monthly financials using accounting software involves a few clicks of your mouse, especially if your accountant is interested enough to help you with things like depreciation or splitting loan repayments between interest and principal.
6 – Budgeting.
So many business owners don’t bother with a budget yet tracking your income and expenditure against your budget or what you expected to sell or spend is a simple and cheap, extremely effective, business tool. If you know you’re not on track you can then at least investigate, find out why and then take corrective action. Even if your future sales are uncertain, budgeting for your costs should be easy and then you can work back up to the required level of sales by using your Gross Profit Margin and use the figure generated as your budgeted sales. If the figure is unrealistic at least you know you’ve got to do something drastic.
Budgeting with accounting software is as easy as pie, there’s no adding up or cross-casting, you’re given the option of using last year’s figures and then adjusting these for individual or group changes or alternatively, you can export last year’s budget to a spreadsheet, work on it as you please and import it back again allowing wholesale changes at will.
A lot of business owners operate completely in the dark, with no meaningful business information other than their turnover and bank balance. Running a business can be tricky enough as it is, so why make it any more difficult than it is? Accounting software with inventory control, at $499, is less than the price of a weekend away for two!
If you need help with increasing your profits using accounting software contact us on 0800 ASK NICK or by email.
(*) Source: Williams, A.J., A Longitudinal Analysis of the Characteristics and the Performance of Small Business in Australia