How often have you had a meeting with your accountant and they have pointed out some areas of concern. But pointing out the areas is only the first step, have you then been left with a problem to solve without having sufficient information to tackle this.
Here are 3 common problems which are highlighted through your financial accounts and here are my suggestions on where to look for solutions.
1: Your stock is too high:
If your accountant is telling you they feel your stock is too high this is because you may have a cash problem. Your accountant will suggest reducing your stock as a way to free up cash.
In order to trace the reasons for high stock holdings you need to go into your stock ordering and managing process to see if this is working correctly. Over ordering and inaccurate stock figures are often the key reason why your actual stock figures are too high.
If you feel that you are ordering and using stock correctly in accordance with your production demands then maybe you need to look further down the supply chain to your actual manufacturing process. Do you have pockets of stock lying around on the shop floor or production line? This normally indicates a bottleneck where one part of the process is moving quicker than another. Focus on these areas to speed up the process here in order to eliminate or minimise stock pockets and speed up your production lead times.
2: Your profit margin is falling
Your accountant may point out that your margins are reducing. This is where the actual profit per £ of sales revenue is falling. So even though you may have sold more in terms of £’s you have actually made less profit. A term we often refer to as ‘running harder to stay in the same place’.
In this case you need to look at the structure of your costs and try to understand what is driving this cost. If labour costs are a high proportion of your cost base then look to see how you can flex this labour more efficiently with your sales output. It may be cheaper to have 5 operators and have 10 man hours of overtime a month than 6 operators being underutilised throughout the month. Likewise for non-labour costs for example energy costs being caused by running the plant and equipment in your company. Is it better to do a long continuous production run and then close down for 1 week, rather than running slower but continuously? Production planning should always look at alternative production scenarios to ensure you are operating your cost base in the most efficient manner.
Don’t forget also to review your pricing desisions. If your increase in sales has been generated by granting discounts on price and you are not benefiting or identifying opportunities to save costs by increasing your production quantities, all this does is reduce your margins.
3: You’ve got too much debt:
This means that your business is paying a lot in interest payments on its loans and could also mean that you lay yourself open to not having sufficient costs to pay your suppliers if a customer does not pay you on time.
First you need to understand why you are in debt. Are you making losses which are compounding monthly, increasing debt as a way to fund losses is not a viable solution. Something has to change now in order to turn those losses into firstly a breakeven point and then into profit. Identify the steps that need to be taken to deliver this and measure yourself against these. E.g. do you need to temporarily consolidate your position, perhaps you have grown too fast and you need to reduce your cost base down in order to give yourself the breathing space to improve. Identify your areas of failure which are impacting your results. Often poor quality can impact on your costs and sales .Sort out your quality issues first then push back up for increased sales.
This is just a brief outline of where to look if you have been given the pointers by your accountant. The financial figures reflect the effect of actions and decisions being made within your company. In order to solve these problems, this will invariably mean you need to roll up your sleeves, go back into your business to the operating areas, and understand exactly what is causing this.