The most important step in taking control of your business performance is to understand your numbers. Imagine you are a Doctor and your business is your patient. The financial reports give you the symptoms of the good or poor health of your business. Having a good understanding of the reports enables you to pinpoint areas that require a more detailed diagnosis.
The 3 most important financial reports for your business are:
1. Your Trading Account
2. Your Profit and Loss and;
3. Your Balance Sheet
Our next 3 blogs will cover each of these reports in more detail without Accountanese we promise!
Your trading account is like a lap counter on a race-track – it measures how much return you are making from each sale after you have deducted the direct (or variable) costs that were incurred to make those sales. For example, if you are selling computers, the trading account measures the margin you have made after you have paid for the cost of bringing those computers into stock to be sold. Or, if you are selling labour, the trading account measures the margin you have made after you have paid the wage cost of that labour.
Fixed costs like rent, power, phone and loan interest are excluded as these are costs you incur irrespective as to whether or not you make sales.
The most important thing to take note of in your trading account is your sales. Clearly you want to see sales going up but, more importantly, you should know which items you are selling more or less of. Consider breaking your sales down into categories or locations / departments. This way you will have greater visibility of the strengths and weaknesses in your sales process. Likewise, you should use your sales by product or service to calculate your average dollar sale or your sales by customer. Drilling down into your sales like this will help you make a better diagnosis and allow you to come up with the right prescription to cure any business ills.
The second most important thing to take note of in your trading account is your gross profit (ideally as a percentage of your sales). Your gross profit percentage is the proportion of every sale (on average) that you have left after the variable costs have been paid. The higher the percentage, the more efficiently your business is operating and the more you will have to cover your fixed costs. As with your sales, if you can report on your gross profit by product or service or location you will be able to make a better diagnosis of your business health.
A great calculation to do from your trading account is to work out your ‘breakeven point’ – the amount of sales you need to achieve at your current gross profit percentage in order to cover your fixed costs (including a fair wage to yourself as one of those costs!!).
With the advent of cloud-based accounting systems and real time data it is now so much easier to create a regular monthly trading account. From here we can work together on strategies to drive up your sales and improve your margins.
Talk to us about how you can make a better diagnosis of your business health using your trading account.