What Your Books and Records Reveal About Your Company
Your books are great story-tellers. While your financial reports may seem like nothing more than a bunch of numbers on a page, they can reveal volumes about the health and direction of your company. Your books and records can tell the story of success, growth, or challenge.
What are some of the stories that your books can tell?
Your business makes money – “How much money did I make” is usually the first thing on everyone’s mind. Profitability is often seen as an indication of a successful business. If you’re bringing in more money than what you are spending, that’s a good start.
You can’t stop there. Be sure to take a closer look at your revenue and expenses.
Is there room for more profitability? – One approach to improving profitability is to sell more of your products or services. Consider a few things;
- Are add-on services or products an option? If your company performs IT services, are ongoing maintenance contracts an option? Should you expand your product offerings to include hardware?
- How do your prices compare with your competitors? Are they higher, lower, or about the same? If you are finding that your prices are lower than your competitors, you may not be charging enough to cover your costs. If your offerings are similar to your competitors, you may be pricing yourself out of the market if you are charging more.
- If you sell multiple products or services, which ones stand out? Which ones are you spending the most money and time selling? If you find that you are spending more effort selling a product that generates a low amount of profit, you might consider focusing your efforts on products or services that have a higher return.
While the common approach to improving profitability is simply to increase your sales, it’s not the only plan. Take an overall look at what you are spending for the month and for the year.
Determine if these payments are:
- Absolutely necessary – Expenses such as rent, utilities, and insurance are typical expenses that you would expect to pay every month. You may have some leeway to reduce these amounts when you renew your lease or insurance policy. If you choose to install LED lights or updated thermostats, you may save on utility bills.
- Important, but may be improved – Some of the expenses we pay each month are necessary, but amounts may be further reduced. Phone bills and internet service are great examples where you may be able to negotiate a lower amount if they have a better service plan available. If you have a seasonal business, some utility and credit card companies may allow you to put a “hold” on your account, which allows you to pay a smaller fee to keep the account open, but not the full fee until it’s in use.
- Nice to have, but not necessary – These are the expenses that can be reduced or eliminated. Meals and entertainment expenses often fall under this category. Perhaps choosing less expensive restaurants or limiting the dollar amounts spent will keep this under control.
Small changes that you make to recurring expenses can have a significant impact over time. Even saving $100 per month will add up $1,200 for the year. Money that is spent on non-essential items should be re-evaluated. Companies that pay monthly bank service fees may be able to reduce these expenses, even eliminate them, if they switch to a different bank.
If you sell a product or service that has a direct cost, analyze how profitable it is. Are you making enough of a margin to cover your indirect costs, such as rent, utilities, and administrative payroll? If not, you may be paying too much for their direct cost or you aren’t charging your customers enough.
Can you pay the bills? – While a statement of income can show that you are making a sizable profit, that’s only part of the picture. A company’s liquidity, or how much money they have to pay bills, tells a story as well. Comparing your current assets against your current liabilities can give you a quick snapshot of your liquidity.
For example, if your current assets are $100,000 and your current liabilities are $50,000, you have two times the amount needed to pay your bills. That’s a good position to be in. If the amounts were reversed, a company could run into a cash flow issue if they need to pay $100,000, but only have $50,000 available.
What does the company value? – Many companies have mission and vision statements on their websites. A business of any size can adopt a corporate social responsibility program. But is what they are paying for consistent with their plans?
You can tell quite a bit about a business by the way in which they choose to spend their money. Companies that are employee-focused typically spend more money on training, recruiting, and benefits. For those who are looking to grow or innovate, disbursements for technology, new staff, or equipment would be expected. Those that offer programs with a charitable intent should have donations being made. How a company spends its money can reflect what they value.
Is your story current? – The story your books tell is only as good as the record-keeping that goes into preparing them. If your books are behind, what does this mean? If you are a sole business owner and are struggling to stay on top of things, a set of books that is months behind can be a signal that you have too much on your plate. You may want to consider outsourcing this task. Not only does come off of your plate, but it will also actually give you more control over your company’s finances as your time will be spent reviewing financial reports, not preparing them.
When your books are behind, it can also tell a story that management doesn’t place much emphasis on keeping current records. If you are looking to obtain a loan from a bank or purchase equipment on credit, this is not a story that you want to tell.
Books and records can reveal many things about a business – where it is successful and where it can improve. The most accurate story can be told when your accounting records are current. Since 1990, Valley Business Centre has helped small and medium-sized businesses stay current with their bookkeeping and payroll functions. We serve clients through the BC region and beyond. If you are struggling to keep your bookkeeping and payroll up-to-date, we can help. Contact the bookkeeping specialists at Valley Business Centre today.
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