There are certain financial essentials, that as a business owner, you must be aware of. To help you with this, here are some questions to discuss with your bookkeeper to help improve your understanding of these issues and make you feel more confident about running your business.
A good starting point is to gauge how you are doing compared to your competitors. This is a relatively simple way to benchmark your performance with the industry average. Ask your bookkeeper if your business income is better than average, and if you’re spending too much on certain expenses. By doing a comparison you will see where you could make some changes. An important question to ask is how you can reduce expenses, without reducing the quality of your products or services. Your bookkeeper can take you through your expenses in detail and it will become evident if and where you can save some money. Discuss with your bookkeeper what your gross profit margin is and whether this is realistic for the type of business you run. Look at what costs are incurred to produce a sale, because the lower your cost of goods sold the higher your gross profit. See if you can increase your gross profit margin by possibly increasing your selling price.
You also need to know your breakeven point and your bookkeeper can show you how to calculate this. Your breakeven point is the point at which total revenue equals total costs or expenses. At this point there is no profit or loss – in other words, you ‘break even’. A business could be turning over a lot of money, but still be making a loss. Knowing the break-even point is helpful in deciding prices, setting sales budgets and preparing a business plan. You also need to look at your net profit. Ask how much net profit your business is making and whether that profit is comparable to all of the effort that you put into your business.
Discuss with your bookkeeper how you can improve your cash flow. One of the easiest and most effective ways is to ensure your customers pay you on time and that you are not paying your bills sooner than you need to. If you have trouble tracking receivables, your bookkeeper can personally contact clients on your behalf when their accounts are overdue. Another potentially difficult conversation to have, but a very important one, is whether you can survive a downturn. By preparing a debt to equity ratio, you can see how much debt is attached to your business and how much your business is at risk should you experience a serious down turn. Discuss what measures can be put in place to help ‘recession proof’ your business.
Also ask your bookkeeper to look at how much of your own money you have tied up in the business and whether you would receive higher returns by putting that into alternative investments.
All these points may seem basic but they are essential to discuss with your bookkeeper. They can help you understand how your business is going financially and where there is room for improvement.