Our last blog covered the importance of the Trading Account in giving you a diagnosis of your business health. The next most important report is your Profit and Loss which measures the overall efficiency of your entire business.
The ‘top line’ of your profit and loss is your gross profit from your Trading Account. To this figure you add the other income you have received that doesn’t have variable costs attached to it – income like interest, rent or dividends. From there you deduct all the fixed costs in the business – the costs that you incur even if you achieve no sales e.g. phone, power, rent, interest and depreciation.
Clearly the greater the profit, the more efficiently your business is operating, generally speaking, the more valuable your business becomes (most businesses are valued using a multiple of the profit achieved).
A regular review of your fixed costs in your profit and loss is a great way to improve your business health. When did you last look at your costs and go back to your suppliers to see if you can get a better price? Are there costs that you no longer need? Could you spend your marketing or advertising more wisely by incorporating free ways to generate more business like encouraging referrals or attending networking events?
Setting a budget each year is a great way to control costs in your profit and loss – if the cost is not in your budget then don’t go ahead with it. Or, if you really need to incur that cost, then find a saving elsewhere so that the business still delivers the profit you need.
Efficiency is doing things right. Effectiveness is doing the right things. – Peter F Drucker
And while we are talking about costs, let’s talk about your Accounting fees; if you see us as a cost then you need to make some cuts – but if you see us as a strategic partner to help you run a better business then you need us more than ever.
Why not talk to us about how you can improve your return on your business by working with us in a more strategic way? We’d love to help you more.