Our target client has a turnover from £500k up to £5M although we have some well above that. I suppose it’s no surprise that we attract prospects who invariable are not receiving prompt and quality management accounts or MI. Although, naturally, we see a biased sample, it never ceases to amaze us how much they are missing by not having quality numbers at their fingertips.
Instead of which most businesses measure almost entirely by sales, orders and bank balance. But this is missing the magic word profit and there’s no hint of margins or overhead control. Most owners are busy managing the business but not the bottom line.
So why is there such a vital gap?
• a lack of skilled resources
• a lack of drive to fix the problem
So what’s the benefit of measuring?
After sales, the two key components of Profit are Margins (sales less cost of goods sold) and Overheads. For both, the first objective is simply to produce the information but it must be sound otherwise it won’t be respected or used. Then a comparison with the previous month and previous year would be sensible and an encouragement to improve. It’s often possible to benchmark against an industry average to see how it compares. Then the trick is to take action, whatever that may be, to improve profits.
It’s all very well and a vital first step to produce sound Profit & Loss information but it’s really important to split a business when measuring margins if in fact there is more than one distinct activity. For instance, with BookCheck Ltd we have effectively two businesses in the one company. The first is book-keeping with management accounts, the second is payroll with auto enrolment. They have different margins. If they are mixed up together then what has caused the up or down of the margin? Which part has done what? There is in fact no way of telling unless they are split. Which is not difficult, it’s just that most of our new clients have never done this.
Margins should also be split by contract, where practical. We have a client with 25 contracts at any one time, lasting 2 to 3 years. Before we split them, the company had one overall profit margin with no idea of individual contract profitability. All they had was a hunch which turned out to very inaccurate and worse than useless. Now they have 25 separate Profit & Loss reports which flow automatically from our BAR - BookCheck Advanced Reporting. The magic was when they recognised that some were good, so they looked for more like them and some were bad so they aimed to improve such or avoid in future. Guess what happened to the profits – of course, a big improvement. Over time it's increased their overall gross margin by 5% which on a turnover of £3M has added £150,000 straight to their bottom line. That's one heck of an achievement based upon just quality reporting. The best bit is that it was not difficult to achieve.
Measuring overheads likewise is the basis for a significant reduction in costs. Would 10% be reasonable? Why not aim for 20% which of your total is how much on your bottom line?
So measuring is a great basis for improvement, it’s up to you
Author - Anthony Pilkington, Managing Director of BookCheck Ltd
