Small business owners are frequently totally involved in
every business activity on a day to day basis. Such close
hands on involvement has major advantages although not
taking time out to focus on the factors affecting business
profitability both as a whole and in detail can result in
the profit performance being lower than is achievable.
An essential first step to improving profitability is to
step back from the day to day business and analyse the
activities and financial accounts from a third party
perspective. Accurate and up to date accounting records are
a prerequisite to the options available since the
accounting records place a value on the trading history.
If financial records are not up to date the next step would
be update the financial accounts by either manually
recording the transactions or using accounting software to
produce the financial accounts. For small businesses this
is often a problem as accounts are often left until the
last minute and produced for tax purposes. Simple
bookkeeping spreadsheets are adequate for many small
businesses while medium sized businesses may adopt more
sophisticated accounting software packages.
List the strengths and weaknesses of the business examining
each activity from sales and purchasing, running costs,
employees and financial control. Use the financial accounts
to place values on the different business activity areas.
This list should be as detailed and extensive as possible
as it is through this listing that plans of action will be
developed and emerge as a business plan.
Particular areas to consider would be past and present
sales turnover being sub divided into product areas, sales
volume and selling prices. Costs analysed by type and
separated into direct purchasing costs, operating expenses
and fixed overhead costs such as rent and premises costs.
The business assets and liabilities is another important
area. List the main business fixed assets and the relevance
and importance to the business. Working capital being the
difference between the liquid assets such as cash, bank
account balances, stock and debtors and the liquid
liabilities such as creditors, bank overdrafts, loans and
credit agreements.
Having analysed the activity and financial areas of the
small business and listed the strengths and weaknesses the
real work can begin to examine and review each area to
determine how each of the historical financial figures
produced from the accounts to accompany the review can be
changed to form part of the future financial business plan.
And that is the ultimate target this exercise is being
carried out to achieve, a serious business plan for the
future. A business plan might be produced in the form of a
financial accounting budget against which the planned
action can be monitored to achieve the target objectives.
Review sales turnover by determining both the sales volume
of existing products, associated products and new product
areas that might be introduced. Examine selling prices and
the relationship with major clients and how additional
important clients can be added. From the analysis produce a
sales plan to improve the sales volume preferably targeted
at those products and product groups which will produce the
highest gross margins.
Sales channels are important and while several sales
channels will already exist they may not have been fully
exploited in the past. Examine the strengths and weaknesses
of each existing sales channel and other potential sales
channels.
Other areas to consider are the selling prices and whether
selected price increases can be achieved and the effect
more competitive pricing might have to increase volume. A
review of existing customers may identify areas where
increased sales can be achievable than increasing sales
volume to lower value clients.
Cost management is an obvious important area. Examine the
supplier base and whether better or cheaper suppliers are
available including shopping outside the existing
geographical area including importing products. The
majority of small businesses and large businesses can
always drive purchasing costs lower.
The cost management review should include going through
each cost component and determining if maximum use is being
made of the services those costs are providing to the
business. Are premises being fully utilised, could storage
be improved, are the best heating and power options being
exploited.
Businesses that employ staff have a whole raft of areas to
consider. Motivation and cost are management are important
as usually highly significant cost bases and areas which
may indicate improved productivity levels, directing staff
resources to the most profitable areas and the level of
staffing and reducing waste through idle time also being
considerations.
Alternate staffing options might be considered particularly
if volumes are variable. Permanent staff levels are a fixed
cost while employing temporary staff or outsourcing
services become variable costs and can be used effectively
to reduce overall costs.
Financing costs should be considered and the finance policy
generally reviewed. Paying high market rates using credit
cards is a poor cost option and any small business funding
operations in this way should consider producing a business
plan to use to obtain cheaper funding.
If working capital is a problem and holding back growth and
opportunities then alternative financing of assets such as
leasing and hire purchase agreements may be useful if the
funds released can be used more effectively. External
financing costs real money in interest payments and should
be viewed against the additional profit that can be
generated through improved liquidity and cash flow to boost
the working capital.
Following a full review the management action to be taken
should be listed and evaluated financially. Produce a
financial budget forecast of the business plan supported by
statements of actions to be taken to improve profitability.
On a regular basis review the progress and its effect on
profitability which may require adjustments as time passes
to exploit new opportunities or revise exist plans.
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Terry Cartwright of DIY Accounting designs accounting
software
http://www.diyaccounting.co.uk/smallbusinessaccounting.htm
on excel spreadsheets providing bookkeeping systems for
small business
http://www.diyaccounting.co.uk/bookkeeping.htm
