Running a business creates a lot of financial information. Sales reports, invoices, payroll, VAT, supplier bills and annual accounts all tell part of the story.
The challenge is knowing which numbers actually matter.
For many owner-managed businesses, a simple monthly review of a few key figures can give a much clearer picture of how the business is performing.
Three of the most useful are revenue, gross margin and cash/debtors.
1. Revenue — are sales moving in the right direction?
Revenue is the obvious place to start, but one month’s sales figure on its own does not tell the full story.
It is more useful to ask:
How does revenue compare with last month?
How does it compare with the same period last year?
Is the business ahead or behind budget?
Is growth coming from more customers, higher prices or a particular service or product?
The trend matters more than one isolated figure.
A business can have a very strong month followed by a quieter one simply because of timing. Looking at several months together gives a much better picture.
2. Gross margin — how much is the business actually keeping?
Turnover growth is positive, but it only matters if the business is retaining enough profit from those sales.
Gross margin can come under pressure for a number of reasons:
supplier costs have increased;
wages or subcontractor costs have risen;
prices have not kept pace with costs;
discounts are being given too easily;
the mix of work has changed.
This is why both the euro value of gross profit and the gross-margin percentage should be reviewed.
A small reduction in margin can have a significant impact over a full year.
For example, a three-percentage-point fall in gross margin on €1 million of sales represents €30,000 less gross profit.
That is the type of issue that should be identified during the year, not several months later when the annual accounts are prepared.
3. Cash and debtors — where is the money?
The third area is cash.
A profitable business can still experience pressure if cash is slow to reach the bank account.
Two questions are particularly useful:
How much usable cash does the business currently have?
and
How much money is still sitting in unpaid customer invoices?
A sale may have been completed and profit recognised, but that does not help pay wages or suppliers until the customer actually pays.
An aged debtor report can quickly show:
how much customers owe;
how long invoices have been outstanding;
whether overdue balances are increasing;
whether one customer represents too much of the outstanding balance.
This is often where the difference between profit and cashflow becomes very clear.
Monthly reporting does not need to be complicated
Good financial management does not necessarily mean producing a large management pack every month.
For many smaller businesses, a useful monthly review can be kept simple:
Revenue | Gross margin | Cash | Debtors | Key actions
As the business grows, additional KPIs, budgets, forecasts and departmental reporting can be added.
The important point is consistency.
Look at trends, not just individual numbers
Reviewing the same numbers each month makes it much easier to identify patterns.
Over time, the business may start to see that:
margins are gradually falling;
certain months create cash pressure;
customers are taking longer to pay;
sales are increasing but overheads are growing faster;
one area of the business is driving most of the growth.
That information is far more useful than simply knowing what happened last year.
Better information should lead to better decisions
Financial reporting should help answer practical questions:
Can the business afford another employee?
Do prices need to increase?
Is there enough cash to invest in equipment?
Why is cash tight despite strong sales?
Is the business actually becoming more profitable as it grows?
If the monthly numbers help answer those questions, the reporting is doing its job.
If you would like help setting up a simple monthly reporting process for your business, get in touch with Podium Finance.
