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Understanding your finances

By Elliot Harris

This is article 3 in our series of 3

There are 3 layers of understanding that you have to achieve, and I will be covering these in 3 articles covering:

Digging deeper with good analysis

The more you grow, the more you need more sophisticated information from your financial systems and fortunately, computerised accounting gives you more options in this area with increasing software sophistication. There are two areas I want to examine here, and these are.

  • sales analysis and
  • costs

Sales analysis comes in two forms:

  • Customer analysis and
  • Product lines

In the case of customers, you will already have information from the most basic debtor’s ledger about things like turnover per customer and the use and abuse of credit limits and credit terms. This will give you a lot of information about your individual customers, the level of their trade with you and whether they pay on time. You will also hopefully have done some credit checks on them before you take them on and also on a regular basis to watch out for nasty surprises as what might have been a good customer once may well be a risk now and of course, the other way around for customers you were doubtful about in the early days.

What the Debtors Ledger will not give you, but more sophisticated reporting will help with is what product(s) you sell to which customer(s). This can give you valuable intelligence, not the least of which is for example, what customers have bought historically, why they don’t buy other products and early warning about product lines. As a by-product, it may give you some useful management information about the performance of your individual salespeople or systems.

In the case of product lines, you need some warning of sales trends per product and whether the sales of new products are supporting or impacting the sales of more traditional products and what that might mean in terms of impact on production and distribution.

Costs are vital in terms of:

  • Overall profitability
  • Stock pricing  and
  • Costing

Where you are manufacturing, you need to ensure that all costs are included in the overall pricing of your product. Thus, at the present time, freight costs have impacted significantly on costs of raw materials and labour costs are under pressure to rise. That of itself will increase the unit costs of your product which will squeeze profitability unless you can pass it on to your customer. Likewise, you need to ensure that ALL costs are calculated in the unit costs of production which might include heat and light costs (again increasing all the time) and any “below the line” costs which impact production.

For other companies where you are buying in stock to resell, the unit cost of different product lines needs to be reflected in your stock control systems so that when purchase costs increase that flows through to the stock system

These are just a few examples of what valuable information you can obtain from your accounting system if you know the right questions to ask.

Elliot Harris | UK Business Advisors (ukba.co.uk)

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