It's easy to get lulled in to a false sense of security when a business is doing a good turnover and turnover is going up.
The problem is though that it is NOT about the turnover, it's all about the LEFTOVER! In other words the profit and growing the profit dollars.
So often I see business owners focused on getting more turnover but have no idea if they are making a profit. Their price list is not based upon the cost of the product or service because they don't know what those costs are. Then at the end of the financial year (tax time) they wonder why there is no cash left to pay the tax, or sometimes, themselves!
Sometimes I have to stop business owners in their tracks by asking the question "So did you intend your business to be a NOT FOR PROFIT?" Because when I go through their financials for the last three years and analyse the figures and trends - that's what they have, a not for profit business!
The first indication to us that there is potentially a problem is when we see Profit & Loss statements that have a single line item "Income" followed by the section "Expenses". In other words there is no breakdown of income by product category or service type. Then there is no section for COGS - Cost Of Goods Sold. The COGS account lines should mirror the income account lines as much as possible with the direct costs associated with each income stream. What's left when COGS are taken off the income is the Gross Profit. It's the dollars that pay for everything else, including the owners income.
When a business owner can see which incomes streams are profitable and which ones aren't they can make good strategic decisions to grow the profit!
Set up the chart of accounts in the management accounts to give you the information you need to make good decisions. These numbers are you dashboard. Remember, it's not about turnover, it's all about leftover!
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