It is a natural phenomenon for small business to be deeply
involved in the particular skills and operations of the
business. A fundamental issue that many small businesses
overlook is that the particular industry in which they work
and their personal skills are just tools of the trade not
the trade of business itself. That trade of business is to
produce a satisfactory bottom line.
While all business keeps financial records and many use
accounting software the serious benefits of producing the
accounts has a tendency to be restricted to accounting for
tax purposes. The most useful function of a good
bookkeeping system is however to use the financial
information to generate higher levels of profitability.
The first step is to acquire and adopt an accounting
software package suitable for the skills and knowledge of
the small business. The second essential step is to produce
a regular monthly income and expenses statement, usually
called a profit and loss account.
Any individual monthly profit and loss account is of useful
by limited value as a financial tool. Several consecutive
monthly financial accounts can be indicative of where
action can be taken to use the bookkeeping tool as a tool
for accounting for profit.
Having produced a set of monthly accounts the next stage is
to simply sit back and look at the numbers. The financial
numbers tell the story of how the business has performed
financially and with an intimate knowledge of how the
figures came about the small business owner is perfectly
placed to consider all potential options.
Sales turnover is a critical area to be considered. The
historical sales income should be viewed in three separate
modes being sales volume, sales prices and marginal
profitability, the most critical and important of which is
likely to be marginal profitability.
It is useful to stand back from the numbers and consider
how the sales volume was achieved, what the driving forces
where to achieve that level and what additional promotion
can be done to increase sales volume even higher. Thinking
about how the sales volume was obtained is the basis for
determining how even higher levels can be produced in
succeeding months.
Selling prices are often driven by market forces and
product costs. An important area to consider is whether the
sales prices obtained where the maximum prices obtainable
at the same volume. Other considerations would be to
consider the effect of increasing sales prices which would
increase profitability if the same volume is maintained and
even the effect of reducing sales prices if the volume of
business increases to produce a higher level of gross
profit.
Businesses in niche markets can charge a high selling price
for the products or services without affecting the demand
for the goods. On the other side of the coin the
supermarket approach could be adopted by generating high
volumes of sales from promoting the products at the lowest
available prices.
The most critical area to be considered is the marginal
profit from different products or services. The marginal
profit is the gross profit which is the difference between
the net selling price and the variable cost of that
business area.
A lot of time can be spent working in the wrong direction,
By identifying the most profitable items compared with the
time and effort involved the small business can become more
financially efficient by diverting more effort to those
areas producing the highest financial returns.
The essential tool to this study is to maintain accounting
records on a regular basis and produce a monthly profit and
loss account. Periodically take a step back and consider
the direction, future and opportunities available based on
historical performance and the changes required to
positively influence the bottom line, using and viewing the
accounting software as a business tool. That tool is
accounting for profit.
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Terry Cartwright, accountant and CEO at DIY Accounting,
designs accounting software http://www.diyaccounting.co.uk/
on excel spreadsheets providing complete single and double
entry bookkeeping systems
http://www.diyaccounting.co.uk/bookkeeping.htm
