Analysis

Building profitability

External analysis by a specialist provider on an ongoing basis gives an objective view of the business and its current business practices. Knowing that the business’ finances are being managed professionally and proactively, allows management to focus on building growth.

Building profitability over time involves ensuring that any growth is controlled, sustainable and adequately funded.

Reliable and timely management accounts should alert business owners to a profitability issue. In the absence of reliable management accounts, lack of profitability can be detected by tight cash flow. This could be caused by declining sales or overheads increasing rapidly.

Make your monthly management reporting reliable and take notice of any warning signs that things are not right. It can take quite a while to turn things around so you need to take action before real damage is done.

You need to know that your business is profitable overall, but the real secret to increasing profits is to know where you are making good returns and where you are not. This allows you to focus on the more profitable parts of your business and to stop wasting time and effort on areas that are not so good for your profitability.

In the long run, a business must have adequate profits or it will fail, and sustainable cash flows only come from profit.

There are other significant consequences, besides weak cashflow, of poor profitability to consider. For a start, most businesses are valued on some multiple of sustainable profits, so poor profits mean the value of the business is not appreciating, and in fact, may be declining. Lack of profits will also restrict your ability to invest in key opportunities for future growth, such as:

Product development

• New plant and machinery
• New IT
• New people
• Web sites

These items are either paid for in cash or financed through debt. But, with restricted cash from trading, that option is not available and alternatively, securing finance will be difficult without good numbers.

Key business drivers

A key part of the business planning process is identification of the business drivers, or those factors that drive your revenue and your major costs. It is critical that your management reporting system measures such drivers. Being in a situation where the business drivers are not known or measured should be a warning sign.

Another warning sign is major fluctuations between monthly results. This may indicate unreliable information.

Small to medium business

One of the benefits of a privately owned business is flexibility in setting and achieving business objectives.

Many people go into business to achieve independence and the freedom to do their own thing. We understand that for many, it is not about profit maximisation, but achieving a balance between lifestyle choices and financial rewards. However, a number of business owners do not receive an acceptable return for the hours they work or the capital they invest in the business. In fact, if a commercial wage and a risk adjusted return on capital invested were computed, many privately owned businesses would not be profitable. You can only work on sweat equity for so long.

Health checks, working capital and liquidity

Health checks analyse your current position to determine any gaps and prioritise solutions so that you can focus on building profitability. Working capital and liquidity reviews can also identify immediate "calls to action" that otherwise if left unattended could threaten the survival of the business or restrain the ability of your business to achieve growth.