Successful business owners learn from their mistakes. The effort required to operate your business may seem overwhelming, and you have to make a multitude of decisions every month. Once the month is over, you may take a quick look at your financial statements and move on to the new month. That approach is a mistake because you’re not making changes to improve your results.
Your financial statements have the answers.
Financial statements reveal important data that can help you grow your business, and you should invest some time and dig into your financial results. If you make this task a priority, you can avoid mistakes that may kill company growth. Consider how this owner benefits from reviewing her financial statements.
Jill operates the Riverside Café, a restaurant with a growing customer base. The café has just completed a successful month of November, and Jill anticipates a busy December. Riverside’s sales have increased for nine consecutive months.
What’s your budget?
How do your actual business results compare to what you expected? Creating a budget- and comparing your budgeted amounts to actual results- is an important tool for maintaining company growth. If you don’t perform this analysis, you may not notice an increase in costs or a lack of efficiency in your business operations.
The bottom line: higher sales may not generate higher profits, and some businesses lose money when they increase sales. Imagine, for example, taking a 600-kilometre road trip with three different check-engine lights on in your car. The further you drive without fixing the car, the higher the risk of a breakdown.
Assume, for example, that Riverside’s largest expense is food costs, and Jill budgets carefully for the cost of meat, chicken and other food. Jill’s budget assumes that food costs are 70% of total sales. It’s an easy metric to track, and this percentage helps Jill track her overall food costs.
The November income statement indicates that food costs are 82% of total sales, and the price paid for meat is 14% higher than budgeted. After doing some homework, Jill contacts her meat supplier and negotiates a lower cost per kilo of meat. Jill’s review means that Riverside can control its costs as sales increase.
Start the process of managing business growth by creating a budget and analysing your actual costs each month.
Pay more, use more
There are three reasons why your costs increase. You paid more than planned, you used more than budgeted- or both. Riverside’s higher cost of meat was due to a higher cost per kilo than was budgeted. The meat costs may also increase because the kitchen staff is using more meat in each dish than was planned.
To eliminate this type of cost increase, Jill’s head chef can train the staff on the proper amount of meat to be used in each dish. Keep the “pay more, use more” concept in mind as you review your costs because it will help you determine how to resolve a cost increase.
Sales and collections
A cash shortage may also kill company growth, and you’ll quickly run short on cash if you don’t manage cash collections as sales increase. Accounts receivable is defined as money owed by customers. If your receivables grow at a faster rate than sales, you may not generate enough cash to operate the business.
Riverside, for example, is rapidly growing a corporate catering department within the restaurant. In recent months, Jill has noticed that she’s collecting cash at a slower rate. Instead of paying for a catering purchase within 20 days, her average corporate customer now pays in 40 days. The balance sheet indicates that accounts receivable are growing at a faster percentage rate than sales, and Riverside may have to borrow money to operate in December. To resolve this issue, Jill must improve her collections process. That’s where software like QuickBooks can help.
Jill starts reminding customers who have not paid in 30 days and calling clients if an invoice is 45 days old. She also requires that each catering customer pay a 20% deposit on each catering purchase. These policies have the effect of weeding out slow-paying clients, which helps to reduce the cash collection problem. Customers will realise that Riverside takes payment issues seriously, and they will either pay faster or do business elsewhere.
Comparisons are ok
How do your results compare to other companies in your industry? This type of analysis can help you assess how well your business is performing, and you should compare your results to similar companies.
If, for example, the typical catering business collects money from customers in an average of 20 days, that timeline is a goal that Jill should try and reach. Industry averages help a business owner realise what is reasonable, and that gives a company direction as it grows over time.
Take action now
Many owners understand these concepts, but simply don’t have the time or financial expertise to manage company growth. If that description applies to you, don’t allow the situation to prevent you from addressing growth. Find an accountant who can perform a monthly review, because the benefits of the review will be more than the fees that you pay to an accountant.
If your sales are growing and you’re not analysing your financial statements, higher costs and lower cash collections may damage your growth plans. Take action and review your monthly financial statements, and make changes to improve your results.