A business’s success hinges on its ability to make a profit, which is why it’s easy to get caught up on your end of financial year (EOFY) profit and loss figures. However, your business financials can provide insight into potential opportunities for future growth and a reviewed strategic direction. Here’s how you should digest your EOFY financials for future business success.
Whether your business is large or small, EOFY figures are an essential insight to your business performance. However, they should not be read in a vacuum. This is because for many businesses, it takes a few years of losses before real growth can begin.
According to the Australian government’s Small Business Key Statistics and Analysis report, the proportion of budding firms (companies just starting to develop) that reach fully operational status versus those that are terminated are roughly the same (31% and 35%, respectively).
What’s more, a similar proportion of budding firms (34%) continue to struggle to achieve venture creation. Therefore, profit and loss figures aren’t everything. If they were to be relied upon alone, those budding firms attempting to break into markets would never have a chance to succeed.
So what kind of intelligence can you gather from your EOFY figures? Here’s where the real secrets lie.
Assets vs. Liabilities
Achieving a healthy balance of assets and liabilities is particularly necessary if you plan to apply for business finance, which can be an effective way to grow and invest in your business, or in certain aspects of your operations.
Depending on the nature of the finance you intend to seek, a credit provider will look at the value of your business assets against liabilities owed to determine whether you are an attractive loan customer.
However, if your asset and liability schedule looks a little unhealthy, don’t fret – there are finance options that don’t require a business health check. An example of this is cash flow finance, which effectively uses your business invoices as security for the loan.
Forecasts and Projections
Reviewing your EOFY forecasts and projections is a great way to determine whether the business is on track to meet its strategic goals. Realistic forecasts are important, and they should be conservative and well devised.
If your business meets or exceeds certain forecasts but falls flat in other areas of performance, it might be time to review those areas as challenges for future growth or change.
Budgets and Capital Expenditure
You’ve heard the adage “you have to spend money to make money”, but overspending or underspending can cause business risks that you need to address at EOFY.
Look at how your budget was allocated last EOFY – was it effective? Does it need adjustment? Was there a return on investment? By looking honestly at budgets and expenditure you can determine where you need to spend money, tighten expenditure or even review your existing supplier third-party contracts.
Accounts Receivable and Payable
Cash flow is the lifeblood of a business, and your accounts receivable and payable can offer insight into whether you have an opportunity to improve existing cash flow.
If your outstanding accounts are significant, consider changing your invoicing methods or payment terms next EOFY. For example, use QuickBooks Online, which offers the ability to send invoices electronically, saving time and money.
Shorter payment turnaround times can encourage debtors to inject money back into your business sooner, so you are not left out of pocket for too long.
Furthermore, if the same debtors of outstanding accounts keep showing up in your records, it might be time to scale back work for those customers and focus on the more diligently paying ones.
If your business consists of several employees, consider how their key performance indicators are contributing to your overall business performance.
Look at data indicating who is making the most sales, and how their contributions are impacting the business’s bottom line. Top-performing talent are a valuable investment, and may require consultation to develop a plan of growth and development within the organisation.
This may include financial and non-financial incentives and benefits, training and development, rewards and recognition or improving tools and resources to enable them to succeed further in their role.
By taking the time to analyse your EOFY figures, you can have firsthand intelligence into the performance of your business, giving you the ultimate plan for moving forward next financial year. For more business tips, visit our Small Business Centre today.
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.