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Error free 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 organizations 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?”

 

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.
    • Divisions or branches – 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.
  1. 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.
  1. Accounts Receivable Balances (also referred to as Debtors List) – shows what customers owe you and for how long.  You want to minimize those outside agreed trading terms.
  2. Accounts Payable Balances (also referred to as Creditors List) – shows what you owe to suppliers and for how long.  You want to maximize time taken to pay without damaging supplier relationships i.e. negotiate longest terms possible.
  3. 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.
  4. Work in Progress – showing how much work is in progress, but not yet invoiced to customers.  Objective being to minimize WIP and get jobs invoiced ASAP to speed up cash flow.
  5. 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 maximize billable time to increase sales and profit.
  1. 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 cash flow forecast mentioned below.

 

The above 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:
      1. Number of customer enquiries
      2. Number of quotes produced
      3. Sales conversion rate
      4. Number of items produced
      5. Number of billable hours worked
  2. Cash Flow Forecast – showing what will be your monthly cash balance for the future (say three, six or twelve 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. Pension/Superannuation report to ensure payments are up to date, as business owners can be held personally liable for non-payment.
  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’.  Remembering that increased sales can cause cash flow 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 the 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.

 

For more detail on these reports download our eBook ‘What a Business Needs to Get Going and Grow’