Using Bookkeeping Data

by Mark Salmon

Welcome to Using Bookkeeping Data to Grow Your Business

This page sets out some of the ways in which bookkeeping data can be used to control and grow your small business.

Key Leverage Points

I am starting this section by illustrating how a business can double its profits if it makes a 5% improvement in just four key areas, even if overheads increase by 10%.  Download and study the chart below:

Key Leverage Points

The Key Leverage Points are:

- Increasing the number of customers
- Increasing the transaction frequency
- Increasing the average transaction value
- Increasing the gross margin.

If you need some ideas on how to do this, head on over to myOffline Marketing page where you can download lots of ideas.  You need to monitor the key leverage points above in your business.

Increasing the gross margin can usually be accomplished by simply increasing your price.

Most small businesses under-price, rather than follow a strategy of differentiation, or serve a niche, to facilitate premium pricing.

Pricing

Understand the Impact of your Pricing Decisions price tags

The ‘Pricing Decisions’ charts below illustrate the impact on  businesses of reducing or increasing prices.  Find your gross margin and then find out how far your sales have to increase/reduce for a given price reduction/increase to produce the same level of profitability.

Before you reduce your prices or offer discounts, consult these charts before making your decision.  Small changes in pricing can have enormous impacts on the bottom line.

Pricing Decisions

The Cost of Discounting

Here’s another way of looking at the cost of discounting.  Download the table below to see the equivalent rate of interest for offering a discount for early payment.  The numbers are staggering.

Equivalent Rate of Interest for Discounts Table

Miscellaneous Ideas

How to Improve the Profitability of Your Business
I used this e-book as a promotional brochure for my consulting business – it has some useful tips in it, in addition to summarising some of the information above.

How to Improve the Profitability of Your Business

Key Performance Indicators
This special report lists all the possible key performance indicators that might be applied to a business.  The key is to pick those that really are ‘critical’.

Table of Key Performance Indicators

The Breakeven Point (BEP) breakeven chart

This is the point at which income from sales equals all costs.

To calculate breakeven, you first need to separate fixed and variable costs.

Fixed costs tend to stay the same over ‘normal’ increases or decreases in volume e.g. most overheads such as salaries, rent, admin, travel etc

Variable costs vary directly with increases or decreases in output and sales e.g. materials, commission, possibly wages

Breakeven can be calculated by dividing fixed costs by the gross margin percentage (GMP) GMP is sales less variable costs = gross profit which is calculated as a percentage of sales.

Any increase in fixed costs puts up your breakeven point.

It is useful to calculate your breakeven point when investigating the viability of your business.

For example, you may want to calculate breakeven in a variety of scenarios to understand the sensitivity of your business to changes in sales volume or when your costs change or when prices change.

Financial Analysis

You need to watch the trends in your business. Key areas to monitor are:

- Sales (volume and prices)
- Gross Margins (up or down?)
- Key cost figures (materials %, wages % etc)

- General overheads (as % of sales)

- Your cash position now and moving forward
- Cash collection (debtor days)
- Suppliers (creditors days)
- Stock levels (turnover of stock)
- Capital expenditure

The Working Capital Cycle                     Working capital cycle

‘Working capital’ is the total capital invested in the current assets of a business.  This can be financed by a combination of trade creditors, bank borrowing, and various other current liabilities.

The cycle:
- finished goods are sold to customers (hopefully at a profit) who are allowed credit to pay in a given number of days.
- these trade debtors pay the business, hopefully on the due date
- the business receives cash, which it uses to pay its trade creditors.
-more raw materials are ourchased from the suppliers, increasing stock levels, which will be processed and finished goods created.
- the finished goods are sold to customers and the cycle starts again.

The working capital cycle is not watertight.  There are ‘Leaks In’ and ‘Leaks Out’ which can effect the level of working capital in the business.

Leaks In Leaking Tap

Profits
New Capital
New Term Loans
Sale of Fixed Assets

Leaks Out

Losses
Capital Repaid
Term Loans Repaid
Fixed Assets Purchased

Managing Cash Flow
Here is a link to a series of free guides produced by the Institute of Credit Management on Managing Cash Flow

Financial Ratios

This ‘Financial Ratios’ page sets out some common ratios used by businesses to monitor their performance.

Bank Reconciliation & Cash Reconciliation Explained
In simple terms, bank reconciliation is simply checking off the entries on your bank statement to the entries on your bookkeeping system.  It ensures that all relevant information has been entered onto the bookkeeping system and that your bookkeeping ‘balances’ with your bank account.  For example, interest charged/received from the Bank may not be on your bookkeeping system until you do a Bank reconciliation.  In the Crunchers bookkeeping software bank reconcilation is a special module which makes reconcilation easy.

Similarly, cash reconcilation is simply taking the opening petty cash balance, adjusting for all deposits and withdrawals from cash in your bookkeeping and ensuring the closing petty cash balance tallies with your bookkeeping.  Again, cash reconciliation is made easy in the Crunchers bookkeeping system.

Reconciling both your bank account and petty cash is an extremely important check to ensure the accuracy of your bookkeeping.  By doing this job properly, both your accountant and the tax man have extra confidence in your bookkeeping system simply because many small businesses fail to do this or, if they do, it is not built iinto the system to ensure that it is done at least monthly.

Depreciation Explained
Depreciation is a journal entry made by the accountant in the profit & lossstatement to reflect the reduction of the value in fixed assets such as plant & machinery, vehilces and fixtures and fittings due to their wearing out, consumption or other reduction in value. It is a non-cash item.

To calculate the provision for depreciation, 3 things need to be considered:
- the carrying value of the asset
- the length of the asset’s useful economic life
- the estimated residual value of the asset at the end of it’s economic life.

For example, if a vehicle is purchased for £10,000, is expected to last 3 years and at the end of 3 years will be worth only £1,000, then depreciation of £3,000 per annum could charged to the profit & loss account on a straightline basis.

There are various methods of depreciation but the ‘straightline’ method and the ‘reducing balance’ method (i.e. where a % of the value of the asset is depreciated) are the most popular methods.

Depreciation may be adjusted if there is a change in valuations or a change in the estimated useful life of the asset.  Some assets such as freehold buildings may not be depreciated if they are likely to maintain or increase their value.

Prepayments & Accruals Explained
Again this is an accounting journal to adjust the profit & loss account to make it more accurate in situations where you have made a prepayment on a bill (e.g. if you have paid in advance of receiving the benefit) or there is an accrued cost (i.e. where you make the payment after receiving the benefit.)

Let’s take some simple examples to illustrate this:
- if you have paid £9,000 of rent 3 months in advance on 1st April and your year end is 30th April then the prepayment will be £6,000 at the year end i.e. your profit and loss account will show a rent charge of only £3,000 for April and the balance sheet will have a prepayment under current assets of £6,000.
- if you pay your electricity bill of £3,000 3 months in arrears , next due at the end of June, then April P&L will show an electricity charge of £1,000 and an accrual of £1,000 in the balance sheet current liabilities.