There are only three things any successful business needs to focus on from an accounting perspective everything else is hot air and window dressing.
Number 1 – CASHEmbed from Getty Images
By far the most important element is cash. Every business owner and manager must pay attention to and acquire knowledge of the business cash position at any given time and make reasonable predictions of future positions. Cash is the blood of the business coursing around the body and keeping it alive and well. With a little thought and a spreadsheet it is possible to estimate cash income and outgoings on a weekly, monthly and annual basis. Continual monitoring of the cash position will allow any business to maintain a cash buffer against unknown shocks and allow investment and business planning decisions to be made. Long term positive cash accumulation on its own will ensure profitability and being aware of potential problems early means corrective decisions can be made in time. Every element of the business can be reduced down to cash including financing of investments and other capital items, dividend payments to shareholders and tax payments. Cash encompasses all aspects of the business so a sound understanding of where it comes from and what it is being used for is essential.
Number 2 – MARGIN
The second thing to focus on is Gross Profit Margin. This is simply the difference between what it costs to produce the product or service and the price it is sold for net of Vat elements. The easiest way to track this is as a percentage. Take the total margin and divide by the total sales to give a Gross Profit Margin percentage. The higher this is the better. Monitoring the margin will show improvements or falls in the profitability of the products produced by the business, allow pricing decisions to be made and make decisions regarding the costs of production. If the margin is too low it will show that it is uneconomic to be in that market and the business can decide to cut costs, increase price or exit the market all together.
Number 3 – OVERHEADSEmbed from Getty Images
The third and final essential element are overheads. These are all the other pre-tax costs deducted from the total margin to give a profit number. Every pound (or dollar, yen, euro etc) saved on overheads drops straight to the bottom line. That is why cutting these costs is so beloved by businesses acquiring other businesses. Reducing overheads is the quickest and in most respects the simplest way to increase profits. Overheads have a habit of creeping up over time slowly eroding the profitability of the business unless they are routinely monitored. Cutting out non essential costs is a sure route to profitability.
Of course there is more to running a business than finance and accounting so focus on these essentials and you will have more time to deal with manufacturing, sales, marketing and finding the right people to make your business fly instead of fretting over complex KPI’s.