I suggest that your accounts need exercising as much as you do.
This starts with putting in quality figures fit for purpose. And ends with the ability to work the figures so they demonstrate and clarify things for you, helping you make better decisions.
Look on them as more than simply keeping Companies House and HMRC happy.
Put them through a workout for your benefit!
Gross Profit Margins
Why should you bother with gross profit margins?
They are the first stage to profitability. If these are small or even negative, you’ve no hope of making a profit.
What are they?
Very simply, the difference between the price paid and the price sold. If you pay 10p for an apple and sell it for 50p, you’ve made a 40p gross margin.
If you check these regularly, you’ll notice if they’re falling or increasing, better or worse than the year or month before.
If they’re falling it might indicate that your suppliers’ cost increases aren’t being passed on to your customers and you’re at risk of making an overall loss.
You might find yourself being busier, but less profitable which isn’t good for your health or bank balance.
If they’re rising, perhaps you’re selling more higher margin product lines and you want to understand why and capitalise on it even further.
You may need to:
- Increase prices on some products, not necessarily all of them.
- Reduce prices on other products.
- Negotiate with suppliers for better volume or early payment discounts.
- Carry out more market research on comparable pricing and markets leading you to change your product mix.
- Amend sales force incentives to change behaviour to suit a new environment.
- Reduce stock levels for slower moving items.
Only by knowing your figures do you really know your business.
Start with healthy core information and then give it a workout getting relevant reports produced from which you can take the best action for your business.
We’ve only looked at one aspect of your figures. The same principles apply for many other areas such as cashflow, net profit, debtors, creditors and, of course, tax.
Happy New Year!