‘Understanding Your Accounts’ Part 3 – The future is in your hands!

In this series of blogs ‘Understanding your accounts’, we’ve looked at whether your accounting numbers can be useful beyond mere compliance with tax and company filing rules. We’ve also reviewed a simple example of how a balance sheet works, and identified a couple of areas to help you manage your business.

In this final blog we build on these to see what ‘hidden data’ is in your accounts and how to turn it into management information to aid your decision-making in growing your business.

Consider the following questions:

• Do you categorise your sales income….. by product; geographical area; market sector; sales location? It may be a combination – but can you easily identify and allocate your sales into segments that are useful to you?
• Similarly, can you do the same for your costs….. raw materials, labour, distribution and other costs, to see segmented profitability?
• How long does each of your customers / clients take to pay you?
• How long do you have to pay your suppliers after they have delivered to you?
• Do you know when during the month / year you will come close to your last £1 in the bank?
• Do you know how much your business will be worth at the end of the year?

‘Why should I look at this level of detail?’
Being able to identify the detail will help you understand the true ‘cost and value drivers’ within your business and help you to take decisions about the future.

Have a look at:

• How profitable each product / area / sector / location is – including the timing of cashflows;
• Seeing if you covering your business overheads – and if all products / areas / sectors / sales locations are contributing at the same level;
• What action you may need to take now to mitigate a pinch on cash in the future.

Having a report at least once a month that identifies all of the above (+ more!), is an excellent tool to see where you have been, and more importantly to use it to see where you are going!

‘But how do I predict the future?’
You can’t of course. The usual investment disclaimer ‘the past is no guarantee for the future’ is true, but it is a good enough place to start with preparing forecasts. You know your business well and if you have a good understanding of the data described above, you can use it to estimate how each future month is most likely to turn out.

By focusing on the underlying detail, your forecasts will be much more tailored and predictable than sticking a ‘finger in the air’ to guess your sales and profitability. More importantly you will be able to identify and better understand the reasons why you exceeded, or missed your forecast.

Developing this critical skill will enable you to feel more confident in taking informed decisions to minimise poor future performance and to focus on maximising the right activities to grow your business.

Blog by Richard Colling SouthWestfd, Associate Director at SouthWestfd

richard.colling@southwestfd.co.uk