It’s nearly the end of another financial year. Most business owners spend this time reflecting and assessing what was achieved, learnt and changed.
It’s an annual recognition of how the inevitable bumps in the road were met and managed, a season of self-congratulation and recriminations.
For many, the stage for gauging their business success is set by the old Bankers Mantra “turnover is vanity, profit is sanity, cash is reality.”
Poetic, isn’t it? But this old piece of wisdom can also be severely misleading without a closer look at what it implies.
Turnover, or sales, means money coming in.
It’s tempting – if total sales value this year is up on total sales value last year – to say “That’s it. We did well” or “We just need to work harder next year” if sales are down.
But magnificent sales achievements tend to prove worthless or futile when not put in perspective with profit and cashflow.
Being able to boast vast amounts of turnover or sales does not make for business success alone.
It’s the business that’s making huge amounts of profit that is the truly successful one.
Profit needs a verifiable means of checking to tell if your cashflow is healthy so your business can thrive and that you’re not living in some realm of fantasy as you trade.
Checking in with your accountant to finalise year end accounts is not the end of getting a yearly financial assessment.
Your accountant’s sole focus at year end is to legally minimise how much tax you have to pay. Their review is a general one and in this context your accountant spends no time looking at your business for product/service profitability, cashflow support or your future profit plans.
If you engage your accountant to conduct a thorough analysis of your business accounts, it should occur within three months of the end of June at the latest so the data remains relevant.
How to review your financial year:
- Compare Turnover (Sales) of the separate products/services or groups of products/services to last year. Note the variance and put some thought into reasons why there is a difference, and what you can do going forward to improve/change.
- Compare gross profit in dollar value and percentage earning for the separate products/services or groups of products/services to last year. Again, note the variance, asking why and what can be done to improve.
- Compare final profit of the year to last year. Again, noting the change, consider reasons for it being higher or lower (in general); brainstorm improvement ideas for the year ahead.
- Don’t leave it for year-end. For a guaranteed successful 2018 year end, a business owner should be spending at least one hour every month having some sort of conversation about the numbers in their business. This could be with your business partner, coach, bookkeeper or accountant. If they are not able or willing, then a financial performance consultant who specialises in this area is the perfect fit.
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