Business Performance – A Highly Effective Approach
I was recently referred to a sizeable business in Hastings who was very worried about their business and their finances. They were having to pump their own savings into the business to be able to pay their large payroll bill & suppliers. They were speculating wildly as to the reason why. Fraud was suspected as the problem had occurred before. Maybe they had they lost control of their business? Were customers not paying their bills on time? How could this be when turnover had not decreased in comparison with previous years?
They asked me for help so I had a good think about what I was likely to find and the best way to find out what was going on. Did I need to brush-up on the latest forensic audit techniques? Take a high-powered support team in with me? Use every ounce of my long-experience in business accounting over 28 years? Run their figures through the latest expensive analytical software?
I set to with my normal enthusiasm and found that:
- Their overheads had increased significantly.
- Their payroll costs had risen through overtime and poor job-control.
- Their inventory had increased by over 30%.
- To continue to get business they had started to discount their prices to match the competition.
- Suppliers had started to re-build their margins knocked by the recession by increasing their prices.
- Credit control had slipped meaning Accounts Receivable days had gone up by 21 days.
The outcome was that their break-even point had increased by 26%, which meant that they were not covering their costs. In addition, the deterioration in Accounts Receivable days and Inventory days had used up all their cash reserves and overdraft facility.
So what ultra-modern, high-powered investigative, forensic audit techniques did I use to find out what had gone wrong?
Just lowly old-fashioned monthly Management Accounts (or internal financial statements as they’re called by our cousins in the USA) running from the date of the last Annuals. They were operating running a decent accounting software, they could have done this themselves, but didn’t realise they could, having never received any advice or encouragement from their accountants over the 10 years they had been taking their expensive fees, nor the required opening balance adjustments at the start of each year.
Not only had I had found out what had gone wrong, but I could now help them set-up some simple systems to prevent it happening again – things like activating the perpetual inventory system on their software, regular Key Performance Indicator reporting and ongoing monthly management accounts.
The lessons to be learned? Don’t “wing-it”, set up some simple systems, get a decent accountant and most-of-all, don’t wait until it goes wrong!
If you want to secure your business future, contact me on 0800 ASK NICK or email firstname.lastname@example.org before it’s too late to make a difference!