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 what's LEFTOVER in the bank. It's about 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 probably don't know what those costs are. They often base their prices on what the competition or doing or they just haven't reviewed their pricing in years.
At the end of the financial year (tax time) they wonder why there is no money left in the piggy bank to pay the tax, or sometimes, themselves!
When working with a business owner, I often have to stop them thinking 'turnover' 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 (or four years now due to COVID) and analyse the figures and trends - that's what they have, a not for profit business!
The first indication that there is potentially a problem is when I see Profit & Loss statements in the management accounts 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.
Preferably, the COGS account lines should mirror the income account lines at least at the category level. Your accounting system will have the ability to break everything down to a cost per item or service so that you can set your pricing at the margin you want to make.
This is business 101, and the accounts need to be set up to tell the owner what they need to know. At minimum, obviously depending upon the business:
- How much profit each product or services is making
- Who are the profitable customers, by account, category or other demographic
- Are some geographic areas more profitable than others
- Where are the most profit ollars coming from for least effort
There are many ways to analyse the data if the data is collected in the first place.
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!
If you are a business owner and want to know more about turning your business into a saleable asset, then schedule a 'no obligation' call with me!
