Do you have “Financial” Control of your business
by Colin Linke on 25/01/10 at 8:31 am
Ok we have explored the strategic and budget process that every business should investigate, over the last couple of weeks. But what I really want to know is whether you believe that you have a clear understanding and ultimately control over your business – from a financial aspect?
If I printed off your profit and loss statement and your balance sheet and asked you 5 questions could you answer them?
- What is your annual turnover and what are the drivers of your sales performance?
- What is your gross profit in dollar and percentage terms.
- What are your 5 highest expense lines – that you can directly control?
- Do you have enough working capital for your operations?
- What is the value of your business today?
Now if you are really honest and answered correctly, I would guess that most of you said no to all of those questions. I rarely come across a potential client who knows this information or can locate it it quickly in their financial position. In my opinion you need to know these off the top of your head because they are key to how you are performing.
So how do you get to that level? I amm glad you asked!.
Firstly you can’t get there unless you have the right information. This means your bookkeeping must be complete and current. If your bookkeeper can;t complete the work in the time that you have allocated then find out why and make some changes. You cannot correctly review old or outdated data and expect that to provide the information that you need. if your accounts are not current then get them current.
1. Turnover:
Turnover is simply the revenue or sales that you have achieved in the last 12 months. If you had prepared a budget then you would know this information – both actual for the last 12 months and what you expect to get in the next.
Revenue does not include “sales” of reimbursable expenses unless there is a profit or margin made on these. As an example, in Melbourne virtually every real estate agent that I come across has the advertising that they have “sold” to a vendor in their gross revenue. As the legislation only allows you to recoup the actual cost of the advertising, and as every agency that I have come across makes a loss on this area, then this item should be part of your cost of goods sold and not sales. Your revenue is only the commission earned from your sales and property management functions.
Now the factors that drive your revenue are much harder to understand. This is where a detailed budget helps as it forces you to look at how you get sales. A law firm looking at its revenue will find that the majority of their work comes from a few sources – namely referrers, LIV website, previous clients, advertising and transactional based activities. So if your business is transaction based and we are in a GFC then you may have some issues and need to investigate how to get other work in.
If you do not know where your work comes from then how can you review and implement changes to it that will effect the outcome?
If you do not have a budget then print out a list of your transactions over the last 12 months, or a list of clients and their sales and note down how you got that business. That will quickly show you some trends that can be worked on.
After this has been completed you will have a rudimentary list of the sources of your revenue. You then need to decide how these drive your business. E.g. if your work is referral work then how are you tracking this? Do you have a plan to meet with, chat with and reward each referral source? Most people don’t!
Your sales drivers are the key drivers to success for your business and must be clearly identified and strategies put in place to work on them. Without knowing these you cannot possibly have control over your business.
In our business we spend a great deal of time getting this area right. We work with our clients to ensure THEY identify and understand how they get sales. It is a detailed process that involves a great deal of questioning and critical analysis of the business’ activities – however the rewards are significant.
……Next Time: the other factors.
