Are my Profits that Bad, or is it just Bad Bookkeeping?

Are my Profits that Bad, or is it just Bad Bookkeeping?

When your business gets to a certain size you may decide to employ a Bookkeeper to input and process your financial numbers for you. This can be a great help especially if they are raising your invoices for you, dealing with all your paperwork and receipts and generally keeping your books up-to-date.

The problem often raises it head when although the paperwork feels like it is all being handled for you, when you actually want to look at the product of all this inputting and processing, well the figures just don’t make sense.

You know you sold far more last month so why is it showing your sales figure as a third of what you know you did. Likewise, you may look at your Profit and Loss report from your accounting software and think, “But why does my profit figure looks so good!” In fact, it’s so good, it’s totally unbelievable because if it was that good, you would have noticed the change in you bank balance.

This dilemma can leave you in limbo as a business owner especially if you need to have more insight from the figures.

Here then are 3 quick checks you can make to see if it is bad book keeping or actually bad performance that is giving you the figures you are seeing.

 

Do a high level check on you Overheads Figure.

If you run your Profit and Loss statement over a number of months your Overhead figure should fall within a broad range of amount.  Overheads by their very nature tend to be fixed in the short to medium term and therefore will often do a step change up because you have , for example,  taken on additional resources. If they are fluctuating all over the place both up and down this indicates that the adjustments as descried below are not being made. This means your profit figure will likewise fluctuate as an impact.

To check to see if this is happening, run a balance sheet report from your accounting system and look to see if there is an account called prepayments and/or accruals.

These two accounts are used to post manual adjustments which almost inevitably must be posted in order to properly record the true picture for your business for the current month. These accounts allow for adjustments to be made for annual bills which need to be spread across 12 months rather than showing as a full cost in the month the bill is paid. If left unadjusted, this could distort your accounts and makes it look like you have had a really bad month. Examples of these types of bills are Rates, Annual subscriptions, annual maintenance or service costs.

Also, not all suppliers will bill you on time, so if you know you have been supplied a service in a particular month and you have not received a bill you will need to adjust the accounts to allow for these costs.

Check your sales figures, do they reflect the actual amount of activity you carried out in the month.

Your sales figures should be allocated to the right month. If you are raising invoices, it is the invoice date which will determine which month these sales will show in. Therefore, if invoices are not being dated correctly, or invoices are not being raised in a timely fashion then your sales for the month will not reflect the reality. The reality should be the actual activity you have done in the month, which is not necessarily the same as the cash received in the month.

Check that any spend on large items and assets have been spread over a number of months or years.

If you know you have spent money on a large piece of equipment, new website, office equipment or anything really valued over £5K, check to see how this has been allocated into your accounts. Your larger spends if allocated as a cost in the month, will not reflect the fact that an asset will last you for a number of years. In fact, allocating this type of spend on some asset, all to just one month, will dramatically change the profit for you in the month. If left in this way, that month will look pretty poor and the correct treatment should be that the spend is spread over 3 to 10 years depending on the type of asset it is.

These 3 checks should help you determine quite quickly if your figures are credible. Just knowing will enable you to move forward in your actions, make the correct decisions based on credible data and ensure your business continues to grow and prosper.

If you enjoyed this article  check out my other resources and help guides on my resources page.here

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