If you are making high profits, how should you invest them within the business to help it grow? If you are struggling to pay the bills, what can you do to get through the current position and make sure it doesn’t happen again?
Under the tax laws you are required to prepare accounts, but understanding them is the key to business success. There is a big difference between paying your accountant to prepare and submit annual accounts and actually understanding what you are looking at, getting them prepared monthly and acting on what you see.
However, before you rely on the figures there are ten questions you need to ask:
1. How up to date are they?
If you only rely on last year’s figures, things may well have changed since.
2. How accurate are they?
Have major renovations been included as running costs or long term expenditure? Does it matter?
3. How complete are they?
Often accountants will make ‘end of year’ adjustments but have such adjustments been included in the figures you are looking at?
4. How do this year’s/month’s figures compare to the last few?
Are there seasonal trends that need to be included in the review of the figures?
5. How do the actual figures compare to the budget?
Have you prepared projections to acquire funding or simply to plan how to take your business forward? Many businesses prepare projections but then don’t compare to see how accurate their projections have been…and what is coming next.
6. How do your figures compare to the standard ratios for your industry?
Even if you don’t know what the industry standards are, there are certain minimum and maximums your accountant would expect for your type of business, find out what they are and see how close your figures are.
7. Do they include a provision for tax, recompense for your time?
If you are looking to sell the business, or even stand back from it, there will be a cost in replacing the time you spend. Has this been included in the accounts?
8. Who will see the accounts you are looking at?
How much detail do they include? If they have been prepared for the taxman, there are fixed headings that the expenses and all other figures need to be grouped within. Typically that will not give you enough information to manage your business. As a business owner, you can request any level of detail you want but try to strike a balance between detail that is available and detail that is of interest/use.
9. As well as looking at the accounts, what do you know about the cash position?
Is there enough cash available to pay the bills that are not yet due? Are you sure that all your customers are going to pay you?
10. Having looked at the accounts, what action are you going to take?
Reading a recipe does not satisfy your hunger. Reviewing and discussing your accounts does not move your business forward. You need to use the information to ensure your business does the best it can to quench your hunger for future growth and profits.
Many business owners appreciate that sales and marketing are a key part of every business. Just as important is the finance department. The entrepreneur may know what the turnover is, but what is the average time customers actually take to pay? Can you afford to keep going? Someone else can calculate the figures, but you need to understand them.
Penny Lowe is director of Wellington Consulting Ltd and author of “Understanding your Accounts for the UK Business Owner”
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