Four Vital Things You Need To Know about Your Business – Each and Every Month
Just how much do you know about your business? No, not about what you sell, or how you make or deliver your products and services, I mean the really important things that determine whether you’re going to survive the ongoing recession (just how do they work out those GDP growth figures by the way?) and make it through to retirement or maybe even successfully selling your business.
Here are four of my eight favourite things each and every one of us business owners should know about our businesses:
Whether you’re exceeding your Current Break-Even Point
Whilst all the other things listed in this article are very important, knowing whether you’re exceeding your current break-even point is just about THE most important thing about your business you need to know. Even if you have a cash reserve stashed away, sooner or later you’re heading for trouble if you don’t sell enough to cover your outgoings. And I stress the current, not a historical figure based on your costs two years ago or a gross profit margin you haven’t achieved since the start of the last recession!
Current Cash in the Bank and whether you can pay all your bills for the month
Sounds crazy I know, but many business owners have absolutely no idea about what money they have in the bank, let alone whether they can pay their bills for the month. Why else do people persist in sending cheques that bounce? Even an accountant I spoke to recently doesn’t have internet banking! Come on now, we’re in 2015, not 1915!
As for knowing whether you can pay all your bills for the month, that’s pretty important right? Even a couple of years ago, you could safely pay your bills on the 20th knowing that enough of your customers would pay you on the 20th to cover these, but not anymore as people are, bit by bit, slipping behind a few days. An excellent client of mine uses a monthly spreadsheet template to predict whether their business can pay the bills on the 20th. This works well – they had a shortfall in August and couldn’t pay their Provisional tax. But because they knew in advance, they consulted me and I arranged Tax Pooling to cover the tax – problem sorted, no last minute panic and stress!
Year-end financials prepared many months after the year-end are absolutely useless in managing the financial side of a business. You need to know what profit (or otherwise!) you made last month, the last quarter and for the year to date.
Preparing monthly or bi-monthly financials make a huge difference to business success which can be demonstrated in the very strong correlation between the frequency of financial reporting and business survival:
|Monthly reporting||80% survival rate|
|Quarterly reporting||72% survival rate|
|Half-year reporting||50% survival rate|
|Annual reporting||36% survival rate|
(*) Source: Williams, A.J., A Longitudinal Analysis of the Characteristics and the Performance of Small Business in Australia
With modern, powerful accounting software that is cheaper than a weekend away for two and with so many other benefits (built-in database, timesheets, inventory control, invoicing etc), like it used to be, is no longer an excuse. OK maybe they won’t be quite as accurate as your annual financials but they’ll be a good enough guide upon which to make decisions and take any necessary corrective action.
Gross Profit Margin
Your gross profit margin is the very key to sustainable life in your business. Turnover is turnover yes, but no good to you if you’re not making sufficient gross profit on that turnover to cover all your outgoings. It’s also a vital part of working out your break-even point if you sell goods or services where you incur direct or variable costs. It is necessary therefore to track your gross profit margin at least quarterly, if not monthly. Nothing much stands still in business, and change is constant. Fashion, prices, tastes, the competition, and any reason you like. Are you discounting your prices? Clearing out older product lines at knock down prices? Either which way, know your current gross profit margin and monitor this regularly.
Keep an eye out next week for my final four vital thing you need to know about your business.