The government has published this year’s budget along with its annual accounts. An army of bureaucrats worked on the documents, covering a raft of activities
Tweaking percentages up or down a few points is done for political purposes but we business people are not so fortunate. Our figures need to be realistic, as they are looked at by the Tax Department.We are almost halfway to December 31 and you should have your draft annual accounts by now. They will tell you what happened last year and provide a realistic basis for your forecasts for this year. They deserve a close study, but how close depends on how you manage your business.
I remember a lesson from years ago. I had the annual accounts for a wealthy client and set out to explain the ratios and percentages and all sorts of other facts. My client listened patiently and when I had finished my brilliant review all he wanted to know was how much did the company owe him and when could he get it.
Few of us enjoy such favourable circumstances so we need to use the accounts to understand what happened and why. We need to learn any lessons they can teach us. You will have paid for their preparation so it is over to you to get value for your money by making sure you use them to best advantage.
Many accounting software packages now provide for comparisons in graph form as well as in numbers. These don’t add to the volume of your annual accounts but can be very helpful. Some show comparative figures for the last five years while others include budget figures with the unders and overs.
Talk to your accountant and make sure you get a software package that best suits your needs. Let’s look at some figures.
Sales - These may be increasing, but is that because of price increases or an actual increase in volume? The same questions apply to reduced sales. You need to know so that you can try to find out why.
Gross profit - The gross profit is in effect the margin for the recovery of your material, labour and overhead costs. If they are covered, you have a profit and that has to be the aim of the business. You need to know what the gross profit percentage has been, and the reasons for any changes. Most businesses measure the gross profit as a percentage of sales. Some people talk about the gross profit percentage as a mark up. They are vastly different outcomes. Run some figures to see what I mean. The questions you need to ask will depend on whether the percentage is up, down or steady. Find out and find out why. For example if your sales are steady or dropping and your gross profit percentage is dropping as well, then you are heading into disaster territory. You need to know so that you can work to change things.
Labour costs - The wage cost as a percentage of sales or purchases is a vital figure. It will vary depending on the type of contracts you have been doing but, here again, you need to have the facts and know the outcome. It may mean your labour recovery rate is too low, your productivity has declined or work is being done that is not being charged for. Look into staff training and record keeping. Find out what is wrong and make some changes.
Material costs - You should know what profit margin you aim for on materials and your annual accounts should prove whether you have priced products correctly. You should do this with every contract, but the annual accounts will include the unders and overs and show you the total outcome. If the result is below expectation, you need to check that there is no fraud involved.
Expenses - Here again, it is vital to know what your expenses amount to on an annual basis. Check each item. ACC costs can rise on a delayed basis if your wage costs have increased. Has your rent gone up and what about the local body rates? These all have to be allowed for and covered in your charge out rates. The annual accounts will tell you if they have been. I repeat, check each item.
Depreciation is easy to overlook as while it is a real cost it does not show up in the cash flow. Remember however that if you do not recover it in your charges then it has to come out of your pocket.
Your salary - This item is of vital importance and can easily be overlooked when trying to make sense of the numbers in the annual accounts. You may be on the payroll for a nominal amount during the year but when reviewing the draft accounts you need to allow for a full market salary. That is what you need to price into your costings.
Your annual accounts can be a real gold mine for the management of your business. The trick is to learn from them so that they can help you to prosper.
