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April 24, 2017

What do you really want from your financial reporting?

What do you really want from your financial reporting

If your financial reporting is confined to a profit and loss, you may feel as though it doesn’t answer the questions you have regarding your true financial position.

Every competent bookkeeper, accountant and software package will be able to provide you with a profit and loss and balance sheet. However, if you don’t understand how to read these reports, you may struggle to see how the presented numbers are helping you to reach your goals.

To get the maximum value from your financial reporting we recommend that you start with the questions that you want answered. That way you can tailor your financial reporting so you are able to get the information you need.

Can I pay my month end payroll?

For a large percentage of businesses, cash flow is an ongoing battle.

There are many reasons why your businesses cash reserves will fluctuate. However, for all the variable costs, there will be fixed expenditure that you need to meet every single month.

Both the profit and loss report and balance sheet are historical documents. If you are concerned about cash flow, you need to look to the future.

We appreciate that it can be hard to realistically predict your long-term cash flow. However, you should be able to put together reasonable estimates for the next three months.

A rolling three-month cash flow forecast that you continually update will help you to identify any cash flow problems that may occur in the future. You may feel as though your business can cope with a bad debt, but the actual cash effect may not be felt for a couple of months. Having this advance warning will enable you to adjust now and reduce the chance of problems later.

Can I afford to take on another employee?

If you want to continue to grow and improve your business, you will come across situations where you need to take a financial risk.

This could be taking on a new employee so you can expand your service offerings. It could be deciding whether to take out a substantial loan to purchase equipment that you need to win larger contracts.

Whatever the financial risk is, you need to ensure that this new outgoing can be covered without adding too much pressure to your current businesses cash flow.

In this instance, we recommend adding scenario planning to your cash flow forecasting. This way you can clearly visualise whether you can afford that additional expense if your income fails to increase as expected. This, in turn, may make you reevaluate before you make any long-term commitments.

Am I pricing my services correctly?

Although you and your customers have an emotional connection to pricing, the initial calculations need to be rooted in logic.

Too often either unrealistic discounts are offered to secure sales or prices are set without considering the true running costs of your business.

Choosing a price point that matches or undercuts your competitors can leave you making losses before you have even begun. You need to ensure that there is enough profit to cover not only the costs of providing your service but also the day to day running costs.

Creating a realistic annual budget will enable you to see what costs will need to be covered. Apportioning these costs over your chargeable time will provide you with a breakeven price point.

If you feel as though you trade in a market that dictates your prices, having this information will allow you to adjust your business costs, so you can still price competitively whilst making a profit.

When will I begin to make a profit?

There are two key stages when your business will make a profit.

The first is when you have provided your service and the second is once your business has incurred all its costs and outgoings.

The goal is to make sure that you have enough profit at the initial sales stage to cover all outgoings and leave you with enough at the second stage, partly to pay yourself but also to have the funds to reinvest in the business.

Using the same annual budget that you use to check your prices, you can begin to predict what stage in your financial year you will begin to make an actual, year-end profit.

For example, if you know that it will take four months’ worth of sales to cover your annual costs, your business should have eight months of purely profit making income. However, if it takes you ten months to cover your annual costs, then that leaves you with only two months’ worth of profit-making sales.

Knowing this break-even point will help you to identify how high or low risk your business currently is.

This is especially useful if you have a seasonal business or if your market suffers an unexpected downturn. The fewer months you have following the break-even point; the less time you have to recover the income you need to cover your costs.

What jobs do I make the most profit from?

There are many occasions where the profit and loss account contains all the information you need.

The profit and loss are made up of the totals for the period. This is helpful if you want to calculate some of the key ratios such as profit percentages.

Sometimes though, only having the totals to view can hide the trends and patterns that you need to make better decisions. For example, one large profitable job can hide the smaller losses and break-evens.

You may want to consider monitoring the profitability of each service you offer, or if you work on contracts, the profitability per job.

The result would be several smaller profit and loss reports, but through these, you could quickly identify what is working and what isn’t.

Maybe you simply don’t know

If your mind goes blank when you think about financial reporting, the easiest way to start is to focus on either your goals or what worries you.

If cash flow is a constant source of stress and you can’t understand why then this is a sign that you need more information in this area.

If you have considered the financial reporting you require within your business, please get in touch for an informal chat.

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