Understand your accounts to increase your profits

During a visit to a struggling security alarms/camera installations business, we sat down to review their latest year-end accounts together. They explained that they made 50% profit on each job and just needed more jobs to become profitable.

Yet looking at their full-year accounts, their average profit on a job was just 20%. By the time they covered their fixed expenses, like rent, heating and wages, there was not enough profit left to pay themselves.

Without us sitting down together to review their accounts, they would never have discovered that half of their jobs made no profit at all, and many lost money.

They were suffering with personal debts and yet up to that point, all their efforts had gone into trying to increase sales, without realising it was not their major issue.

Numbers Are The Language of Your Business

Your business has the ability to speak – it talks to you in numbers. If you don’t understand what it’s telling you, perhaps it’s time to look a bit more carefully at where you spend your time.

The job of business is to make money and provide employment. That’s pretty much it – you can bring ethical ideas and moral scruples into it as you see fit, but business is a pretty straightforward thing.

Unfortunately when we learn the skills that we use in business (like a printer learns printing and graphic design, an electrician learns wiring, etc), we often are not taught about finance. Many accountants don’t speak in plain English either, leaving you at a loss to understand the business you own.

It doesn’t have to be this way, of course. Understanding your accounts takes a little effort, but the basics are straightforward enough with just a little effort. We need to know things like…

  • What’s your breakeven sales point?
  • How much are you owed (debtors) and how much do you owe (creditors)
  • How much profit do you make on each sale (gross margins)
  • What are your overhead costs, are they all necessary and can they be reduced?
  • What’s your business model – as you grow, what happens to the profits?

Taking the time to understand questions like these can make a profound difference to your business and your life. Just looking at fixed costs, for example, allowed one small internet business to make an extra £500 profit per month by changing their postal arrangements.

Is Financial Management Your Growth Barrier?

Understanding your finances is a vital aspect of success in business. If you’re not in control of your numbers, you’re unlikely to get very far.

At the same time, lack of profit or cashflow could indicate problems elsewhere in your business. Take the Growth Barriers Diagnostic Test to discover what holds your business back – contact us on 01480 370142 for your copy of the test.