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Thursday, November 12, 2009

How to avoid insolvency in the first place #2

It's all about profit

I get asked to help businesses because they’ve hit (or are heading for) a financial brick wall. Something usually triggers the invitation that I’ve received: it could be that the bank manager is concerned about the way the bank account has been run recently; it could be a threatening letter from a major creditor or even a winding up petition. Whatever it is, it’s always to do with money, or the lack of it. So my first job is to find out what makes the business tick from a financial point of view.

All too often, I am met with blank expressions when I ask for costings, cashflow forecasts and profit-and-loss forecasts. This type of financial information can be collectively referred to as “management accounts” and unless business owners have good management information at their fingertips, they can’t make proper decisions about how to run their business. Business owners often know exactly what their turnover will be for the month or year and they easily reel off figures for how much a particular job or contract is worth in terms of the selling price. But the key issue isn't price - it's profitability. There’s no point being a “busy fool” as one of my former colleagues used to say. That’s why it’s essential to know which areas are profitable and which need to be overhauled, re-designed or scrapped. Almost invariably, it’s far better to make a 10% net profit on a turnover of £100,000 than merely break even or make a loss on a turnover of £200,000. It’s no surprise that businesses who don't have a proper handle on their costs end up with serious or even terminal debt problems.

The problem tends to stem from the fact that businesses are set up by people who are extremely good at their job, whatever that job may be, and who are driven by a desire for the potential benefits of self employment. So a good panel beater, or chef, or IT expert, decides to go into business to offer their expert services to the world. Great. However, that panel beater, or chef, or IT expert may have very little knowledge and experience of actually running a business, which usually requires a completely different set of skills. And even if they have those skills, the need to do the business, beat panels, cook great food or do great digital stuff often gets in the way of running the business.

Most firms aren’t big enough to need a full time accountant or bookkeeper, but the good news is that there are a number of people around who can spend as much, or as little, time as necessary in making sure that the wheels don’t fall off your business. They make sure that you have the information you need to decide how best to run your business and the (usually quite low) cost is usually recovered many times over in terms of better decision-making and enhanced profitability.

Try searching for accountants and bookkeepers in your area. Or feel free to contact me and I will recommend some who I've worked with in the past.

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