A lot of small businesses run their businesses on ‘gut feel’. That’s not a bad thing, when you are a very small business (less than £100K) but as your business grows it gets quite scary!
Most business owners who manage their business in this way, use the bank account balance as their primary financial indicator of whether they think they are doing well or not.
Again, that’s fine if you always have a healthy balance in the bank account but what happens where the bank balance keeps fluctuating? This will occur where VAT, Payroll and spending on one off investments in your business can cause a financial cash flow dip until sales income catches up.
If you really want to give yourself the confidence to keep growing your business and your turnover is now over £100K, it is time to start using some relevant management information. You should be able to pull this data from your business accounting system. In fact, if you have a part time book keeper who you can access, you can ask them to pull this data out of the system for you and you simply need to populate the data into the format below.
The aim of this exercise will always be to ensure you capture all of the direct costs you are incurring. Specifically, you are aiming to allocate these against the particular product and service you are selling. The better able you are to attribute your costs in this way, the more accurate and hence valuable this financial reporting will be to you.
Remember, never try to allocate your overheads in this analysis. Spend on areas which represent a shared cost to your business, e.g. rent and rates, electricity, management and IT should always be excluded from this financial report.
Profitability Analysis will help you to see which areas of your small business are profitable and which ones are less so.
It can give you ideas on how you want to take your business forward. Clearly, if one area of your business is loss making, the decision has to be taken, can I turn this around and make it profitable or should I drop this line of work and concentrate on the higher margin areas?
It also feeds your thought process and can enable you to see clearly what you need to focus on in order to help you grow a profitable business shape.
Presented with this type of financial analysis, the decisions around your products and services and where to focus, will suddenly become much easier!