What information should you collect as a business owner?
Financial information is vital to running any size of business. Larger businesses have the luxury of teams of accounting staff to steer them in the right direction. Smaller businesses have to rely on themselves and advice from accountants and consultants. Advice from government organisations will focus on statutory requirements, e.g. tax and compliance.
A common question we hear from small business owners is, ‘What information should I be getting about my business?’
A common question we hear from small business owners is
‘What information should I be getting about my business?’
Here is a general list of what most businesses should be getting as a minimum.
1. Profit and loss statement
- Current month and year to date – with comparison to last year and budget. Particular attention needs to be given to the gross profit figure, i.e. sales less direct costs, as this is a vital number impacting net profit, i.e. after overheads are deducted. To achieve this, cost of goods (direct costs e.g. service labour, products for sale etc) need to be separated from overheads (indirect costs e.g. rent, admin wages etc.) in your ‘chart of accounts’.
- Current month and year to date – with percentage of sales column for each.
- If a business operates multiple divisions, branches or sells various types of products/services, it’s vital to know which of them are profitable. Your ‘chart of accounts’ needs to be set up to achieve this or you may need to use separate software from your general accounting system.
- Sales analysis – i.e. who is buying what, so that you can use the information to improve future sales.
2. Balance sheet
Year to date with comparison to last year. Balances for receivables, payables, stock, work in progress etc should be reconciled to separate reports/ledgers to ensure they match, and investigate if not. Also items such as PAYG and GST should be reconciled monthly to ensure figures are accurate and transactions being handled correctly.
3. Accounts receivable balances
Also referred to as debtors list – shows what customers owe you and for how long. You want to minimise those outside agreed trading terms.
4. Accounts payable balances
Also referred to as creditors list – shows what you owe to suppliers and for how long. You want to maximise time taken to pay without damaging supplier relationships, i.e. negotiate longest terms possible.
5. Stock/inventory report
Showing stock on hand at end of each month. Also report on slow-moving or obsolete stock, so you can decide what to do with it.
6. Work in progress
Showing how much work is in progress, but not yet invoiced to customers. Objective is to minimise WIP and get jobs invoiced ASAP to speed up cashflow.
7. Job management reports
- job profitability
- comparison of budget/quote versus actual results
- labour productivity report – showing what percentage of time was billable. objective being to maximise billable time to increase sales.
8. GST report
Showing either accrual or cash basis, depending on which one your business reports. The amount due or refund should be factored into your cashflow forecast – see below.
These are fairly general minimum reporting. Here are some more that will give you greater insight into your financial results and how you can impact them.
1. KPIs (Key Performance Indicators) – around five or six numbers you need to know are trending right to produce your desired results i.e. profitability. Examples of monthly KPIs might be:
- Number of customer inquiries
- Number of quotes produced
- Sales conversion rate
- Number of items produced
- Number of billable hours worked
2. Cashflow forecast – showing what will be your monthly cash balance for the future (say three, six or 12 months, depending on how tight cash is).
3. Staff leave entitlements – to ensure you don’t get hit with a big surprise to be paid out when you can least afford it.
4. Superannuation report – to ensure payments are up to date, as business owners can be held personally liable for nonpayment.
5. Break-even analysis – helps you to know what sales you need to achieve and set targets accordingly.
6. Sensitivity analysis – ‘what if scenarios’ showing what would be the impact on profit and cashflow if sales increased or decreased by a given percentage. Remember that increased sales can cause cashflow squeeze too.
7. Rolling forecast – if you’ve set a budget this allows you to see the ‘year to date’ results plus the budget for the balance of the year and what will be your results for the whole year if budget is achieved.
8. Ratio analysis – ratios are a useful way of measuring the relationship between two numbers.
Example: current ratio calculated as follows:
current assets (e.g. bank, accounts receivable, stock) divided by current liabilities (e.g. overdraft, accounts payable)
1,000,000 divided by $10,000,000 is .1
The current ratio for this business is .1
The easiest way to explain ratios is as follows:
For every dollar of bottom we have $x of top.
This means for every dollar of current liabilities we have 10 cents of current assets to pay for it. When you consider that banks look for a current ratio of at least 2, a business with a current ratio of .1 would really struggle to get funding.
To make sure this year is your best in business, check out our ebook 3 unbeatable ways to create your best year in business.
Sue Hirst, Co-founder & Director, CFO On-Call
