Your accounts aren’t just a historical document to file away at the end of the financial year. They’re a living, breathing overview of the health of your company, and they contain all kinds of insights into the efficiency and profitability of your business.
So, why do so many small businesses pay little or no attention to these accounts? Without accurate monthly accounts, you can’t see clearly where the business is or where it’s going.
It’s like driving your car with a blindfold over your eyes – and no one would think that’s a sensible way to start any journey!
Removing the blindfold
The key to removing that blindfold is to invest in producing detailed monthly financials, giving you the key numbers that highlight the best route to drive and the difficult highways to avoid.
This is a whole bunch easier with the right reporting tools at hand – and that’s where the new breed of cloud accounting software can come to your aid.
A system like Xero online accounting gives you an efficient, cloud-based way to manage your bookkeeping and finances. But it also provides you with a wealth of reporting functions to keep you up to date with the numbers that are most crucial to your business.
Your balance sheet is an X on your car’s route map that shows you where you are right now. It’s a snapshot of the business as it stands at this exact moment in time, with your important numbers all captured in one report.
By looking at your balance sheet you see your:
- Assets – (your bank balances, current assets and fixed assets such as equipment),
- Liabilities – (accounts payable etc.) and
- Equity – (your current year earnings and money paid out in wages etc.)
Profit and Loss (P&L):
The Profit and Loss is more of a moving GPS view of your car’s journey – it’s not a static report, like the balance sheet. It shows you the moment of cash both into and out of the business over a given period.
So by looking at your P&L report you can see your:
- Income – whether it be sales, interest earned or other revenue streams
- Cost of sales – the wages you’ve paid and other costs of the sales process
- Gross profit – the money you’ve made once your cost of sales is deducted
- Operating expenses – all the costs and overheads of running the business
- Net profit – your gross profit once total operating costs are deducted.
With Xero, you can even run a Business Performance report that gives you a rundown of your business’s most important key performance indicators (KPIs) over the course of the year.
Get a breakdown of your gross profit percentage over a 12-month period up to the current date, or see how this month’s debt ratio compares to prior months. You can tailor the report to show the KPIs that are most relevant to you, and get an instant one-pager overview of the business’s performance with the click of a button.
Understanding your acceptable level of profit
Having these Xero reports available to you 24/7 means you’ve always got your financials to hand when you want them.
And the better the information you have regarding your financial situation, the more of the blindfold you remove and the clearer your view of the road ahead will become.
- You have access to real-time numbers on every part of the business (as long as your bookkeeping is up to date, of course).
- You can pinpoint the exact number you need, whether it’s sales revenue, payroll costs or gross profit.
- When you have a business decision to make you have the data at your fingertips to aid the decision-making process.
And, most importantly, you have a measurable view of your profits and can focus on improving performance, efficiency and profitability.
As an ambitious business, it’s important to set your ‘Acceptable Level of Profit’ (ALP) to give you a clear destination at the end of the business journey. And there’s a simple formula to work out this ALP figure:
Fixed (Overhead) Costs + Profit Desired
= Sales Required for Profit Goal
By working out that ALP, you give the business a defined sales number to aim for. And that’s a vital part of motivating your team, measuring progress against that target over time and improving confidence in the business achieving its goal.
Get more from your accounts
If you’re feeling a little lost out on the business highway, come and talk to us about moving to cloud accounting and getting a better view of your accounts and important financial numbers.
Contact your local Holden Moss office and see how we can remove the blindfold and get your business back on the route to profitability.