24 January 2019
If you own or run a small or medium-sized business and are planning to grow, a business strategy is essential to provide you with structure and direction. This strategy should, crucially, be able to answer the question, ‘Will this give me the financial results I want?’
Measuring your business’s performance on an on-going basis will set you on the right path to achieving your full potential, keeping you on track by having the numbers at your fingertips.
Where is your business now?
Understanding exactly where you are now will enable you to define your strategy – identifying what actions you need to take to achieve your goals. We suggest undertaking a full audit of the business in order to completely understand your current financial position.
Areas to consider are:
- The balance sheet; your assets, cash and liabilities. Do you have the cash or access to finance and the assets (tools of the trade) to take you where you want to be?
- The people you employ across all areas including sales, production, management and administration. Do you have the right people in place now and a recruitment and succession plan for the future?
- The financial systems and processes, how you capture your financial information, where it’s stored, how often you review it and what you currently do with that information. Are your systems sufficiently future-proofed?
- The market; do you understand the trends and political/economic forces affecting your business? The forthcoming introduction of Making Tax Digital for VAT on 1st April is a good example of this.
Define your financial measures
It is essential to establish what financial information you need to manage your business growth and making sure it’s available when you need it. Specific measures include:
- Sales growth
- Gross margin
- Overhead costs
- Solvency and liquidity
- Asset ‘lock up’
These measures – the Key Performance Indicators – may be relevant to the whole of the business or to a particular segment. Examples of KPIs are:
- Trade debtors to represent 60 days’ sales
- Sales increased by 5%
- Value of output per person
Prepare a business plan
Your business plan should include a narrative that outlines your vision, a financial forecast that breaks down your sales targets, an outline of any investment required, debt recovery disciplines and details of the key people who will deliver the plan.
When preparing the financial forecast, decide the time horizon and the reporting interval – a rolling 12-month forecast is a powerful tool. Ensure that this is consistent with your KPIs.
The right tools for the job
Getting down to the nuts and bolts; how do you store your financial information and what tools do you use to help you review it? Businesses use a range of systems, differing in their levels of complexity and technological advancement. The simplest method, still used by a minority of small businesses, is pen and paper – recording all activity off-line. More often, information is captured on Excel spreadsheets which certainly makes it easier to view and share.
The majority of businesses use desktop-based accounting software and, most recently, there has been the emergence of Cloud accounting which offers a number of significant benefits, including the ability to view real-time information whenever an internet connection is available.
How to measure growth
Monthly management accounts offer timely and accurate information. Use your management accounts to inform your decisions – don’t drive blind! Relying on monitoring bank statements alone is risky.
Management accounting should be focused on measuring on-going performance against your KPIs in a readily available, easy to understand format. This will mean you’ll be able to understand your performance against your targets and also what’s happening behind the numbers; keeping your finger on the pulse and informing your decision making.
Your management accounts will help you to understand:
- cashflow – remember cash is king! Know your financing requirements, appreciate any pinch points and make sure you have the right financing in place
- the relationship between inputs and outputs – what you are spending and what results are being achieved
- gross margins – which are your most/least profitable products, services and customers.
If you and looking to grow your business, our seminar, ‘An Antidote to the Dragons’ Den – 10 steps to achieving growth’ may be just what you need. This will take place on Tuesday 12th February at New College, Durham. Please click here for further details.
As ever, we are here to help. If you have any questions about how to grow your business, then please call Martin Johnson on 0191 567 8611 or email email@example.com.
As one of the leading firms of accountants in the North East, with offices in Newcastle, Sunderland and Jarrow, we have the expertise to advise you on a wide range of tax-related issues. If you would like to speak to one of our local experts, please call 0191 567 8611 or e-mail firstname.lastname@example.org.