The most important step in taking control of your business performance is to understand your numbers. Your financial reports give you the symptoms of the good or poor health of your business. Having a good understanding of the reports enables you to pinpoint areas that require a more detailed diagnosis.
The 3 most important financial reports for your business are: Your Trading Account; Your Profit and Loss and; Your Balance Sheet
Our last blog covered the importance of the Trading Account in giving you a diagnosis of your business health. The next most important report is your Profit and Loss which measures the overall efficiency of your entire business.
Your profit and loss
The ‘top line’ of your profit and loss is your gross profit from your Trading Account. To this figure you add the other income you have received that doesn’t have variable costs attached to it – income like interest, rent or dividends. From there you deduct all the fixed costs in the business – the costs that you incur even if you achieve no sales e.g. phone, power, rent, interest and depreciation.
The greater the profit, the more efficiently your business is operating, generally speaking, the more valuable your business becomes (most businesses are valued using a multiple of the profit achieved).
A regular review of your fixed costs in your profit and loss is one way to improve your business health. When did you last look at your costs and go back to your suppliers to see if you can get a better price? Are there costs that you no longer need? Could you spend your marketing or advertising more wisely by incorporating free ways to generate more business like encouraging referrals or attending networking events?
Other ways of improving your profit and loss will vary by business – we call these the key levers of your business. Depending on the nature of your business, these key levers could be productivity of your team, your pricing strategy, minimising wastage, leverage (your ability to do more with less) or a range of others.
Setting a budget each year is a great way to stay on track in your profit and loss. Your budget needs to be loaded into your accounting software system (eg: Xero) so that you can track exactly how you’re going every month against your budget. (Budget vs Actual).
Why not talk to us about how you can improve your return on your business by working with us in a more strategic way? We’d love to help you.
About Pathfinder Solutions
Pathfinder Solutions advisory team members have either owned or managed businesses, or are investors themselves, so we know first-hand the challenges you face in your world.
Sure we’re Accountants, but the best solutions in business come from focusing on more than just the numbers. Our real-world business experience delivers just that.