October 2019

In any business, no matter the size, it is vital to know the financial position at all relevant times and for the business owner to have a good idea how the short/medium term future is likely to unfold. Why? Well, if you don’t know, how can you be sure that there is not a financial challenge around the next corner which cannot be met and may result in business difficulty, or even collapse.

In short, if your business fails because you have no reliable financial information or don’t act upon it when the messages are clear, who will you blame if it all goes sadly wrong ?

Previous articles have always extolled the virtue of timely and informative financial data about your business. In this regard, it is recognised that if the standard profit and loss account and balance sheet format beloved of accountants fails to inform you suitably e.g. because the layout is unclear or difficult to understand, why not prepare something that is relevant to your needs and understandable? Not everyone likes the standard style of information presentation and if you feel uncomfortable with bland figures, how can you reach an effective decision if the current financial position is unclear and the impact of decisions is not understood?

It is not a sign of weakness to receive financial information in a way that you understand i.e. a graph, tabular form, or simple narrative. Perhaps you will wish to concentrate on the key performance indicators which let you know if the business is trading well. For example, a firm of lawyers might measure chargeable hours per person, the recovery percentage of such time by way of fees issued, and cash collected. If these three aspects exceed a pre-determined target, everything else should fall into place and allow the business to prosper.

Even if a business is trading well, producing profits and generating positive cash flow, a business owner will often ask how the business is performing compared to others in the same sector. It is helpful to be measured against competitors and learn from them where appropriate.

In reality, there is a plethora of information available if you know where to look e.g. one’s trade body, special interest groups, discussion forums, local Chamber of Commerce, and the internet. The Office of National Statistics collects/publishes a large amount of business data for numerous industry sectors and further, if you are aware of companies in your industry, why not download a set of accounts from companies house : access is free.

Your lawyer or reporting accountant/auditor will act for many businesses and thus, whilst respecting the requirement for confidentiality, is likely to have a significant amount of information available about how your business performs compared to others. Don’t be afraid to ask, and if your professional advisor can’t help directly he is likely to be able to point you in the direction of a source that can.

Whenever information is sourced and in whatever form, it is important to interpret what you are being told because, for example, your business may have specific circumstances which means that a slavish comparison is inappropriate. However, when you are able to compare, say, a standard gross margin between businesses similar to yours, any significant variations should be queried and corrective action taken. Again, if you are not clear what significance key financial ratios have with regard to your business and your competitors, ask for an explanation.

One word of caution is that “locker room chat” may not be a reliable source of information given the propensity for some business owners to be somewhat over-optimistic with their description of t wellbeing of their business. Also, they may not be fully conversant with their own financial situation in the first place which suggests that a second opinion can be useful. Fake news is unreliable news and shouldn’t form the basis of your key business decisions.

The more trustworthy the information, the more a business owner should feel able to take notice of it and use it to judge financial performance. If the information yields questions, be willing to find answers, listen to advice and act accordingly.

If you have any doubt about how to benchmark your business, or how to obtain financial information that will help steer your business in the right direction, do not be afraid to ask because too many businesses fail because owners don’t understand the financial fundamentals of what they are doing.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport to represent those of the firm in general.