Do you understand your accounts?
Or more importantly, Do you understand the hints they give to improve your business?
If the grey matter just went errrrr?! then you are missing valuable signals to improve your business.
Invest a few minutes today to learn more about your accounting statements.
Understanding this language of finance can reveal strategies that you can immediately put in place to make positive changes to your position.
Over the next few months I will post some short sharp pieces, each focussing on a different ActionPOINT to help improve understanding of your accounts.
Today we´ll look at the Profit & Loss Account (P&L)
The P & L sets out how much revenue you have earned from your customers in a given period and what costs you incurred to achieve it. While it can cover any date range, we recommend regular production of monthly, quarterly and annual accounts.
So here is the boring bit…
Sounds simple enough… but what does the resulting figure mean for you and your business?
The success of the answer really depends on what you were expecting!
Awareness of why the figure is what it is gives you direction on how to change it to your advantage. Read on to understand in more depth.
Changes in this Gross Profit & Loss figure over time could highlight;
Opportunities to increase Revenue
Breaking the figures in the revenue section of your profit and loss document into individual products or product lines will help you see which products are performing well and which products need attention.
Taking the lead from these figures could indicate that your pricing strategy needs a review or that a product would benefit from an investment in marketing… or even withdrawing it completely to concentrate efforts on more successful lines.
Opportunities to reduce Costs
Again, looking further into your Cost of Goods Sold section will uncover a range of sources to recoup lost profit.
A rising figure for material costs means that you need to find more efficient ways to produce your products. The first port of call would be to assess your production staff wages and to consider renegotiating supplier pricing … or even find a different supplier altogether.
Of course inflation will cause costs to increase across a period of time, so some increase is inevitable but can be factored into your considerations.
What did your exercise reveal?!
If your comparison identified areas of change, ask yourself why might this be?
Have your suppliers raised their prices, but you haven’t raised your own? Have you given the team a salary increase, but not raised your prices? Have you changed how you calculate your prices compared to last year?
Grab that pen again, and write down your findings along with why you think the change happened… and what you will do to change it!
Your next Action
A good accountant is a key part of your successful company and should be able to highlight these areas. But, as the captain of your ship, you will benefit from a more solid knowledge of these figures yourself.
As shown above, with just a small understanding of your financial documents, you can significantly raise your results.
Remember, to be truly effective, you should evaluate this on a regular basis in line with ActionCOACH best practice of habitual TEST and MEASURE.
Try ActionCLUB, on us
The next ActionCLUB Session on Monday 16th November 2020 sticks with the finance theme but this time focusses on Building a Budget to aid with cashflow and maximising investment opportunities.
You are most welcome to join a session free to see if our community of local business owners could help you move your business forward.