Many business owners don’t fully understand what their end of year accounts mean. All they show is how much tax you’ve got to pay, right?
Not at all.
Your end of year accounts show much more than how much money you’ve made, where all the money went, or how much tax you have to pay. They’re a source of information on how your business is tracking from year to year, a record of things that went right, and things that didn’t quite go right. You just need to know what they’re saying.
At the most basic level they show where the hard-earned cash went. From there you can compare expenditure from year to year, and then ask yourself (and your accountant who you’re hopefully working with closely) why there was a change. Understanding the reasons for the change will help you put a plan in place to improve your situation, or understand how the change is impacting other areas of your business.
Also, have you compared total annual expenditure against your budgets? Many business owners don’t. That’s a topic for another day.
From the accounts you can pull out a range of financial ratios, such as gross profit percentage, stock turn levels or debtor days. Even if you’re already presented with these ratios do you understand what they mean? Do you take any action as a result? Without measuring these ratios, understanding what they mean, and putting an improvement plan in place, it’s difficult to better your position.
Businesses of all sizes can benefit from looking at their ratios. There’s no business that doesn’t want improved cashflow, margins or efficiencies. Your end of year accounts can measure all of these things – the first step in improvement is measurement.
Accounts are all about historical measurement (and less importantly tax). Make sure you’re using them effectively to improve future performance, and don’t just leave them in the bottom draw never to be looked at again.