What are the profit and loss numbers you need to review?
With interest rates predicted to remain stable for the foreseeable future, many business owners have started the new financial year with cautious optimism.
Head of Client Risk and Analysis for Macquarie Business Banking, Adam Ortmann, says it is important for managers to have a contingency plan
“Most people know what their ‘base case’ is – typically that things may stay about the same or even be slightly better than last year,” he says. "However, the high-performing business owners and managers we work with also have a clear Plan B in mind – that is, what they would do if they didn’t hit those expectations or if the market deteriorated.”
How good is your road map?
“Your budget forecasts, cash flow and profit and loss statement all need to be part of your plan and goals for the business,” says Ortmann. “Everything you do links back to that plan.”
He says it is important to be honest when you review how your business is tracking against your strategy. “It’s not enough to simply review the numbers; you need to analyse them and learn from them. If, for example, profit is hitting budget every month, that’s great. But is it by luck or design? You need to understand the cause and ask questions – because if it’s by luck, you might not have a structure to build on.
The high-performing business owners and managers we work with also have a clear Plan B in mind – what they would do if they didn’t hit those expectations or if the market deteriorated.
What if things change?
If you’re not hitting those profit or cash flow targets, then you need to ask some more difficult questions.
As a base, work out how much you need to draw from the business to keep your lifestyle going. You may need to reverse engineer your financial targets,” says Ortmann. “Ask yourself what discretionary costs could I cut tomorrow if revenue reduced – such as a key client left or market conditions changed?”
These could be items like travel, client entertainment, hiring external consultants or extra administrative support.
“Back in 2008, many business owners realised they could manage with less. They understand the difference between what’s essential to run the business and what you do to improve or invest in the business. It’s an important distinction.”
By focusing on the costs you can control, you may be able to maintain profitability – even if revenue dips.
Check your assets and liabilities
As well as checking expenses, you need to understand where your assets and liabilities are. If money is available, you may want to pay down some debt, such as an overdraft or mortgage, to have more flexibility for your Plan B.
“Businesses with a strong balance sheet are better placed to seize an opportunity in a rapidly changing market,” says Ortmann. “For example, if an acquisition opportunity comes along you may be able to take it up before your competitors – because your financials are in better shape.”
It is also vital to keep a close eye on potential cash flow bottlenecks in stock balances, work in progress and especially overdue debtors. If you aren't being paid on time, you’re effectively financing your customers at the expense of the interest on your overdraft – or at the very least, cash that would be better spent growing your business.
Taking the time to regularly review your profit and loss and budget forecasts is simply good business practice. When growth predictions are a little uncertain, it’s more important than ever. You may be striving to make more – but first make sure you have a Plan B if things don’t go as planned.
Warning signs to watch for on your profit and loss
- Increasing sales and declining profits
- Stagnant revenue
- Increasing interest if you’re funding client payment terms or receivables
- Increasing fixed expenses (such as utilities, salaries and rent)
- Increased depreciation with no added fixed assets
- Increased cost of goods sold
- Profit and cost percentages worse than industry benchmarks.