Your financial reports depict the general health of your business and having a good understanding of these reports enables you to pinpoint areas that require a more detailed diagnosis.
The three most important financial reports for your business are:
- Your Trading Account.
- Your Profit and Loss.
- Your Balance Sheet.
Let’s focus on your Trading Account. In English (rather than Accountanese) your Trading Account is like a lap counter on a race-track – it measures the return you are making from each sale after you’ve deducted the direct (or variable) costs incurred to make those sales.
For example, if you’re selling computers, the Trading Account measures the margin you have made after you’ve paid for the cost of bringing those computers into stock to be sold. Or, if you’re selling labour, the Trading Account measures the margin you have made after you have paid the wage cost of that labour.
Fixed costs like rent, power, phone and loan interest are excluded as you incur these costs irrespective of whether or not you make sales.
The key thing to monitor in your Trading Account is your sales. Clearly you want sales to be going up but, more importantly, you should know which items you are selling more or less of. Breaking your sales into categories, locations or departments will give you greater visibility over the strengths and weaknesses in your sales process.
Use your sales by product or service to calculate your average dollar sales and your sales by customer. Drilling down into your sales helps you to better diagnosis your trading strengths and weaknesses.
Next, you need to monitor your gross profit (ideally as a percentage of sales). Your gross profit % is the average proportion of every sale you have left after paying the variable costs. The higher the %, the more efficiently your business is operating and the more you’ll have available to cover your fixed costs. As with your sales, if you can report on your gross profit by product or service, or by location, you’ll be able to better evaluate the health of your business.
Now, calculate your breakeven point. This is the dollar value of sales you must achieve at your current gross profit % to cover your fixed costs (including a fair wage to yourself as one of those costs!).
With cloud-based accounting systems and real time data, it’s now much easier to create a regular monthly Trading Account. From here, we can work together on strategies to boost your sales and improve your margins.
We’re keen to help you get the most value from interpreting your Trading Account… contact us for more information.
