How Are You Really Doing? Financial Performance
How do you judge your business’ financial performance? Surprisingly, the answer we hear often from clients is that it is still just based on a combination of a general feeling from management and the amount of cash in the bank. Even for businesses that do go as far to draw up management accounts and are probably feeling slightly smug at this point, it is hard to draw meaningful conclusions from historic data alone due to timing and seasonality. We have seen many times the effect of creeping costs, where businesses do not notice the small but consistent growth of costs over time until it is too late, and owners end up shouldering an unexpected reduction in profitability.
The easiest and most effective way to accurately monitor financial performance is first to work out what you are expecting to happen in the form of a budget. As we are in the midst of the most common year ends (December and March) businesses should be looking at what they expect to happen in the coming year and then formulate a budget as a result. The process is relatively simple, by looking at current cost levels and projecting them forward with known changes – e.g. staffing changes, the Employers National Insurance 1.25% rise as well as pay rises, light and heat prices, etc. – and then overlay the income expected in 2022/23. Predicting income can be challenging, particularly given the ongoing challenges of Covid, but a close approximation can be made and can be flexed with time as more is confirmed. The benefits of budgeting are wide:
- They allow owners to have an expectation of profits and hence more certainty with tax estimates and pension planning
- Closely linked to the budget is the cashflow projection which can highlight any cash pinch points in advance
- They give the ability to compare financial results throughout the year to an expectation, therefore making the analysis and conclusions much more worthwhile
- Problems are flagged much earlier – i.e. why are we anticipating such a low profit or why are we consistently below our budget and what can be done?
- Different situations can be modelled, such as hire vs don’t hire, invest vs do not invest etc.
When combined with real time accounting software, reporting against budget can be done without the need for constant manipulation of reports and spreadsheets and can even be automated into visual reports and summaries. We can help businesses with all of the above, and would stress that a well-thought budget is fundamental to having control over your finances.
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