Four steps to a successful profitability analysis

Every business owner must know where the money in their company comes from and where it goes. That’s why financial management is one of the most important things to keep in mind. What is a business budget? Simply put, it's a financial plan that gives a company relevant information on revenue, expenditure, and capital. Business owners also use them as guides to forecast earnings and expenditures and perhaps to hold someone accountable for mistakes and such. If you want an accurate budget estimate, follow the six steps below. Step 1 – Estimate fixed costs The first step is to work out the fixed costs, which is relatively easy. Simply list all expenses and then identify those that show repetitive costs that don't change by the month. These include expenses such as rent, equipment leases, insurance, manufacturing costs, etc. Add up all the fixed costs to get the number and use it for a period of 3, 6, or 12 months. Step 2 – Identify variable expenses Variable expenses are those that are not constant - the complete opposite of fixed costs. Although it's easy to identify variable expenses, it's harder to forecast the numbers as they vary every month. To identify and get an accurate prediction of variable costs, it's critical to record and tally them for a period of time. You’ll soon get an average number of each variable expense. Step 3 – Work out one-time costs Most businesses also have one-time expenses. And although it’s not nearly as frequent as fixed and variable costs, a business budget wouldn't be complete without accounting for the 'sunk costs'. Buying new software or equipment are examples of one-time costs, so is something like getting new furniture for the office. Step 4 – Project your revenue The next logical step is to project your future revenue. After all, one of the reasons to build a business budget is to have something that would allow business owners to compare actual and projected revenue. This particular step allows for the setting of clear goals and understanding how to meet those objectives. Step 5 – Track profits and losses Working out the net profit margin is another necessary step. You can do this by deducting expenses, taxes, and any accrued interest from revenue. The money left over, as a percentage of revenue, indicates the net profit margin. This is a key indicator of profitability and can help highlight issues in cash flow, management, marketing, operating costs, and other areas. Step 6 – Adjust the budget No one should see a business budget as set in stone. It’s because the changing market trends, consumer demand, and other factors can influence the budget. Therefore, the final step is to make the necessary tweaks. A business budget is not static but rather a flexible estimation. By tweaking the budget, you can position your company to adapt to exterior changes. It can also help in changing goals or diverting funds towards meeting the most important objectives faster. Remember, having a business budget is not enough to ensure financial stability. Every business also has to set up an emergency fund with the budget as a guide. Continually revisiting the budget is a must. And failure to re-evaluate can affect the company's financial health and lead to overspending in all the wrong places. If you need help with budgeting and business accounting, the team at ADM Accountancy would love to hear from you. Call 01242 679767 or visit www.admaccountancy.co.uk .

Are you uncertain about the level of success you achieved? There's a quick way to get an overview of your finances. Not enough companies run a profitability analysis - a defining indicator of profit. Such an analysis relates to costs and overall revenue and it can provide insights into how a business runs. The occasional analysis can also indicate if it's time to make some changes. Maybe some clients require too much time for the money. Perhaps there are other opportunities around the corner that you can jump on. Either way, it should be on your list of tasks if you want to ensure long-term business growth. And here's a simple blueprint to follow for a successful profitability analysis. Step #1. Calculate Margins Two of the most important variables in a profitability analysis are gross and net profit margins. You can get the gross profit margin by knowing your sales revenue minus the cost of labour. For the net profit margin, you must subtract all expenses from your revenue to get the magic number - the margin - and then divide the previous result by your revenue Don't forget to look at the segment profits, too. Odds are you offer a suite of services that each has its own revenue stream. Take the numbers for each segment, subtract the costs, and include overheads in your calculation. If you do this, you get a more detailed insight into how money moves in your business. Step #2. Perform Client Valuation Here, you must look at each client and figure out how much each of them brings. Performing a client valuation essentially means to determine the worth of each client. So, subtract from the revenue all of your costs, such as marketing, hourly labour, travel expenses, and so on. After all, you want to find out the costs of keeping each client satisfied. Some clients may not pay a lot for your services. But you may have a better profit margin with them if their projects take very little time from you or your team. Maybe you have good cash flow. But it's possible that when you draw the line, there's not a lot of profit in it. Step #3. Look at the Past Numbers A thorough profitability analysis looks at past quarters over the years. Why? Although your current numbers may look good on paper, you need something to compare them to if you want to know where you stand. Step #4. Benchmark Industry Ratios Your numbers only mean something in the context of your niche. It’s because profitability numbers aren't the same in accounting as in health care, education, e-commerce, etc. If you look at your past and current numbers, you can figure out your business's progress so far. But what about compared to your competitors? What about your position in relation to the market? Always be sure to check average industry ratios to give you a better sense of where your company is as opposed to where it should be. Do It for Peace of Mind and Direction A good profitability analysis can help curb anxiety when it comes to your business. At the same time, it can tell you what you should be doing to improve and grow it. If you ever find your business lacking direction, remember that an analysis can help you spot issues that you couldn't otherwise. It’s a game changer. Speak to one of the team at ADM Accountancy about creating a personalised analysis for your business on 01242 679767. 

Rapid business growth is incredibly exciting but there are some pitfalls, too. In fact, when poorly managed, rapid growth can actually damage your business. That’s no reason to shy away from growth, but it is important to understand how to best manage it so that you can keep customer satisfaction high as your company expands. Let’s take a look at four key strategies to employ. 1) Hire the Right Team The right team will make all the difference to your business growth. Focus on hiring employees who demonstrate a great attitude. You can train an employee up, but it’s very difficult to change a negative mindset. Of course, the right skills are important but in order to keep turnover rate low and morale high, you need to make sure that new hires fit in well with your company culture. Research by the BDC Network found that a positive company culture can increase operating income by 19% and earnings growth by 28%. 2) Stay on Top of Your Finances When your profits and revenue are rising, it’s tempting to sit back, relax and let your finances take care of themselves, but that would be a big mistake. No matter how well your company is faring, it’s important to create a budget and review it regularly. In fact, the faster your business is growing, the more attention your finances need. Growth, revenue and cash flow changes mean that you will have to implement changes to your current system of financial management. Growth often comes with big costs, too, such as equipment repairs and new hires. You may find yourself in need of financial guidance as your business expands. The time for DIY money management has well and truly passed. Now that your needs are more complex, it may be time to hire a virtual CFO so that you will have access to top-level financial advice without taking on the cost and commitment of an in-house hire. 3) Utilise Working Capital Cash flow management is one of the biggest challenges of business growth. Often, a significant amount of spending is involved in preparation for growth and you may find your reserves running low, even as your profits and revenue soar. A working capital loan can help enormously with funding a high volume of orders, securing new inventory, purchasing new equipment or hiring new team members. There are many different options available, so it’s best to speak to your accountant about the right one for your business. 4) Focus on Your USP As you grow, it’s important that you don’t lose sight of what makes your business unique. Your USP is what will make you stand out from the crowd and continue to attract success. Continue speaking directly to the audience that has gotten you this far and look for new and innovative ways to meet their needs. Data and analytics are enormously helpful with this. AI tools can provide you with valuable feedback to show you what you’re doing well and which activities generate the most profit. This data can then inform your next steps. Keep an eye on this data, too, as new patterns may be revealed as your business evolves. Business growth puts significant demands on business owners, but by hiring the right team, keeping a handle on your finances, utilising working capital and staying focused on your USP, it can be an amazing and exciting process that leads you towards success. Call ADM Accountancy for expert advice with your business accounting on 01242 679767.

If your business is a car, then cash is the fuel in the tank. Without it, you’ll break down. Furthermore, if you have to stop every few miles to refuel then it becomes very difficult to pick up any significant speed. As a result, the journey will take twice as long. When you’re driving, it’s important to keep an eye on your petrol gauge. Similarly in business, you need to monitor your cash flow closely to identify any problems before they impede your progress. For small businesses, even one unexpected cash flow shortage can lead to a myriad of issues. For example, you may miss payment deadlines and then end up incurring penalty fees and interest. This in turn eats away at your profit margins. The sooner you can spot a potential threat to your cash flow, the more time you will have to prevent it and take steps to minimise the impact. Here’s how to spot an upcoming cash shortage in your business, and what to do about it. Cash flow forecasting In order to create a cash flow forecast, you first need to know how much money is actually entering and leaving your business each month. Once you have this data you can then forecast your cash flow over the coming months. Remember to factor in any additional upcoming expenses and seasonal spikes or slumps in sales. Note that your variable costs will change in accordance with seasonal fluctuations, too. Creating a cash flow forecast will allow you to identify potential problems and create a plan to protect your business. Compare forecasts to real data It’s important to measure how accurate your cash flow forecasts prove to be by comparing them to real data. This will help you to identify issues you may have failed to account for and create more accurate forecasts going forward. It also helps you measure your performance - were your sales significantly higher or lower than predicted? If so - why? Update your figures Don’t create a cash flow forecast once per year and consider it a job done. It’s important to regularly update your forecasts when any changes occur that could affect your cash flow, such as emergency costs, late payments, price increases or new sources of revenue. Prepare for multiple outcomes One problem that new business owners face is a lack of past data upon which to base their cash flow projections. In this case, you should create cash flow forecasts for multiple scenarios so that you will be able to keep a handle on your numbers whatever happens. First, take an educated guess at what your outcome will be. Then, create a second projection with 10% higher sales and a third with 10% lower. Finally, create a best and worst case scenario. There are no guarantees in business but being prepared for multiple outcomes puts you in a stronger position to handle whichever prediction proves true. Emergency measures It pays to prepare for the worst. Even if you’re in a strong cash position right now, it’s important to arrange multiple safety nets in case things to do go south. Ways to do this include: Arranging a line of credit, which is a preset borrowing limit that you can use at any time and pay back in a similar fashion to a traditional bank loan. Creating an emergency cash reserve. It’s always useful to create a cash buffer, and this could prove enormously helpful if disaster strikes. Ideally, you should aim to put aside enough to cover 6 months’ worth of operating expenses. Securing a business credit card. High interest rates mean that business credit cards are not suitable for long term borrowing. However, your card should offer a certain amount of days interest fee, which makes a credit card ideal for smoothing over short term blips. Cash flow shortages can present big problems for business owners, but by creating, updating and comparing forecasts regularly, it’s possible to take steps to prepare for upcoming issues and minimise the impact upon your business. The worst cash flow issues are the ones that take you by surprise, so it really does pay to be one step ahead. Contact ADM Accountancy on 01242 679767 to discuss accountancy solutions for your small business.

As a small business owner, it is important to stay on top of your financial transactions. This means tracking every sale and expenditure, in order to keep your business' finances organised. However, this can feel overwhelming when you first get started. You need to track your transactions in order to stay on top of your business' finances and ensure that you are paying the right amount of tax. In this article, we'll take you through how to track your business' finances and the different types of transactions that you need to be aware of. Let's dive in. Daily business transactions There are several different types of transactions that you need to track day-to-day for your small business. These include: Customer invoices Vendor invoices Payroll Banking transactions Customer cheques or deposit slips Cancelled cheques These are just a few of the transactions that you need to track on a daily basis. Depending on the type of business you run, there may be other transactions that you need to track as well. For example, if you sell products online, you will also need to track inventory and shipping costs. It's important to keep on top of these transactions, as they will give you a clear insight into your business' finances. This way, you can make sure that you are keeping accurate records and that your business is running smoothly. Month-end transactions At the end of each month, you will also need to track some additional transactions. These include: Bank reconciliation Accounts receivable Accounts payable Cheques and deposit registers Sales report Inventory ageing report Payroll register Monthly income statement Balance sheet Tracking these transactions will give you a clear picture of your business' financial health. This way, you can identify any areas where you may need to make changes or improvements. You should also compare these transactions against the previous month, as well as the same month last year, to get a clear picture of your business' growth. Year-end financial transactions At the end of the year, you will need to track some additional financial transactions. These include your annual: Income statement Balance sheet Cash flow statement These documents are important for tax purposes. They will also give you a good indication of your business' financial health for the year. This way, you can identify any areas where you may need to make changes or improvements before problems begin to pile up. Cloud accounting software It may seem impossible to keep track of all these transactions, but thankfully there are some tools that can help. Enter: cloud accounting software. Cloud accounting software makes it easy to track your business' finances and see where your money is going. This way, you can make sure that your records are accurate and up-to-date. With cloud accounting software, you can automate invoices, upload receipts via your smartphone, keep an eye on cash flow and generate detailed financial reports with the click of a button. This way, you can gain detailed financial insight into your business whilst also saving time. There are many different cloud accounting software options available, we recommend Xero as our preferred software for business. Each of these software options has different features and pricing plans. It’s best to speak to your accountant or financial advisor about the program and subscription package that best suits the needs of your business. Keeping on top of your small business' financial transactions is essential for keeping accurate records and ensuring that your business is running smoothly. Trust us, in three months’ time, you’ll be extremely glad that you started tracking today. Speak to one of the team at ADM Accountancy on 01242 679767 about our accounting packages.

Before listing the components of a cash flow forecast, it’s crucial to understand the concept of what this kind of forecast is. Essentially, it’s a vital tool that helps you understand your finances. To be precise, a cash flow forecast is an estimation of how much money comes in and goes out of your company. And it can be as detailed as you need it to be and for whatever period. But for a cash flow forecast to be useful in any business, it needs to have the following components. 1. Projected Sales This is what all cash flow forecasts depend on. A good way to come up with projected sales figures is to look at historical data. You must use seasonal patterns, promotions, market trends, and past figures to estimate future sales. But if your company is new, it’s possible to make sales projections from competitor, supplier, and industry data. 2. Projected Expenses Every business has expenses, including rent, insurance, manufacturing, and others. That’s why it’s a key component when making a cash flow forecast. It’s essential to have a firm understanding of what goes out of the company for the next month or year, depending on the term of the forecast. 3. Projected Outgoing Payments To make an accurate cash flow forecast, you must know when payments have to go out. Make sure to check with suppliers, vendors, investors, banks, and service providers. Include that information in the forecast to know e xactly when you have to pay more. It should also give you a good idea of any delayed payments. 4. Projected Incoming Payments When working with repeat customers and clients, it’s easy to see patterns with your cash inflow. Look at historical data to see how people pay and identify how many of your customers pay upfront. You also have to figure out how many of them delay payments or perhaps often pay late fees. Knowing when money comes into your business will help you make a more accurate cash flow forecast. 5. Communication and Good Software Working with numbers isn’t as hard as it used to be, thanks to all the technology available today. That’s why software is a vital component when it comes to making a cash flow forecast. Of course, the accuracy of a forecast also depends on communication between various individuals and departments. If people don’t input the right numbers and ignore concerns or inefficiencies, you will end up with bad information in your database. Although cash flow forecasts rely on numbers to give you the desired projection, those numbers come from people. That’s why having clear lines of communication in a business can help ensure the accuracy of the data that you work with. Don’t Sleep on Projections You can’t rely on a single cash flow forecast for the whole duration of the business, especially if it’s a longer-term one. Lots of things can happen from year to year and month to month. And a forecast that looked promising two months ago may not hold true two weeks from now. That’s why it’s critical to create one early on, ideally at the start of every financial year. As you proceed, revisit the projection and adjust accordingly since cash flow forecasts are flexible. If you'd like support with Cash Flow Forecasting, contact the team at ADM Accountancy on 01242 679767 or visit: www.admaccountancy.co.uk

Bookkeeping is essential for tracking and understanding your business's financial performance. It helps you better understand where your money is coming from and where it’s going, and empowers you to make informed decisions that will help your business succeed. It also helps you stay compliant with tax laws, manage budgets, and make better decisions about how to allocate resources. Let's take a deeper dive into how bookkeeping can be beneficial for your business. 1. Better budgeting Bookkeeping can help you create and manage accurate budgets. It allows you to assess how much money is coming in from customers, expenses, and other sources, and gives you a better understanding of where your business stands financially. With this information, you can create more effective budget plans that will help you jettison your business to success. 2. Accurate financial reports Bookkeeping allows you to easily generate accurate financial reports that give you a better understanding of your business’s financial performance. This information can then be used to make more informed decisions about how to allocate resources, spot financial trends, and identify areas where you can save money. 3. Tax compliance and savings Bookkeeping helps you ensure that you are in compliance with tax laws by providing accurate financial information. This allows you to avoid costly mistakes and potential penalties from the IRS and other regulatory agencies. Additionally, bookkeeping can help you save money by enabling you to take advantage of deductions and other tax benefits that apply to your specific business. 4. Cash flow management Bookkeeping also helps you manage your cash flow more effectively. With accurate records of expenses and income, you can better plan for cash flow needs and avoid potential problems such as overdrafts or insufficient funds. This will help you make sure that your business has the money it needs to succeed. 5. Confidence One key benefit of bookkeeping is that it can give you peace of mind. Knowing exactly where your business stands financially will give you the confidence to take risks and make decisions that will help your business grow and succeed. 6. Setting targets and goals It's difficult to set specific goals when you have no idea what your numbers are, but bookkeeping can help you identify your current financial performance and help you come up with realistic targets to strive towards. You'll also be able to accurately measure your progress along the way because you'll have the data you need to track your progress. 7. Organised records Unorganised records are a ticking time bomb. Bookkeeping helps your business by keeping records organised and up to date, enabling you to quickly access the financial information you need when you need it. This makes it easier to answer questions, identify trends, and make decisions that will help your business succeed. If you let your records become too chaotic, you can be sure that your business won't reach its potential. That's why bookkeeping is so essential to the success of any business. With accurate and up-to-date financial information, you'll be able to make better decisions and take advantage of every opportunity that comes your way. As you can see, bookkeeping is an essential component of a successful business. It can help you stay compliant, manage budgets, and make better decisions. With accurate financial records, you'll be able to take your business to the next level. If you need help getting your bookkeeping in order, consider working with a professional bookkeeper or accountant to ensure accuracy and consistent record-keeping. With the right help and strategies in place, you can be sure that your business will be on its way to success.  Contact ADM Accountancy for all your bookkeeping requirements on 01242 679767 or visit admaccountancy.co.uk

Increasing sales volume is a significant profit driver for businesses, but it’s not the only way to earn more profit. Furthermore, increasing sales isn’t always a manageable strategy for small business owners and entrepreneurs who are just getting started, since it often requires a large inventory and hiring more staff. Let’s take a look at how you can boost your profits without selling more. What is profit margin? Your profit margin is the percentage of your turnover that you actually get to keep; it’s the margin by which your sales exceed your costs. So if you sell £1,000 and spend £600, your profit is £400, making your profit margin 40%. Bear in mind that average profit margins vary widely across industries and business models. Low profits Low profits are bad news because they make it difficult to invest in growth and protect your company during difficult times. There are many factors that can cause low profits including: Low sales High operating costs Poor inventory management Low customer retention rate Many business owners believe that selling more is the answer to the problem of low profits, but that’s not always true. There are several more efficient ways that can help you increase your profit margins and make more money without increasing your sales volume. Negotiate with suppliers Negotiating with suppliers can help you to reduce your expenses and thus create bigger profit margins. Shop around and speak to your suppliers about the possibility of bulk discounts or early payment incentives. Monitor inventory As mentioned, poor inventory management often plays a role in low profits. If you overstock on a product that doesn’t sell fast, you may lose money over time due to depreciation, expiration and misplacement. Increase prices Raising your prices is a straightforward way of increasing your profit margins. Underpricing your products in order to drive sales reduces your margins and makes it more difficult to cover your costs. Competing on price works well for big businesses because they can afford to focus on sales volume rather than high margins, but many small businesses will achieve greater success by focusing on quality, convenience and excellent service. Eliminate unprofitable items It’s important to understand the gross profit that you make from a particular product or service. If an item is making you very little in terms of profit then it may be worth getting rid of it so that you can replace it with something more profitable, or simply streamline your selection for simpler inventory management. Of course, you must weigh up profitability against sales volume. If you sell a very large volume of a product with a fairly low margin, it still may be worth keeping it. Get rid of slow-selling items Conversely, products and services with a very high gross profit margin are only actually profitable if they sell. Otherwise, they’re simply bulking up your inventory and tying up your assets. Reducing your supplies is an effective way of keeping your operating costs low and maximising your margins. Systemise Systemising your business will help you operate at maximum efficiency and thus reduce your costs. This means putting clearly defined processes in place and using technology to automate many menial tasks to save time. Essentially, it means having your business run like a well-oiled machine rather than a slow, spluttering engine. There are multiple ways to boost your profits without increasing sales, and many of these strategies may be better suited to the needs of a small business. Remember that it’s not about the money you make, it’s about the money you get to keep. ADM Accountancy specialises in supporting small businesses and SMEs within the Professional Services sector, with all their accountancy needs. Call us today on 01242 679767.