If you only meet with your accountant once a year it is vital that you use that time to really understand how your business is performing and what you need to do over the next year to achieve your goals.
The key questions are:
1. How did my business do compared to the previous year?
Sales may be up but profits down (or preferably sales are down, though profits are up). Understanding whether this is a trend or caused by a one-off event is essential to making decisions on how to have a better year.
2. Where has the money gone?
Often business owners are hit with a tax bill at the end of the year but have no cash available to pay it. This may be caused by cash tied up in stock or debtors, or because cash taken out of the business by the owner is greater than the funds generated. Often cash has been used to fund growth in the business without any cash flow forecasting. Cash is always king – if you cannot turn profit into cash your business may be growing too fast, or you are neglecting to put enough time into managing your business finances.
3. Is my pricing right?
Pricing is 20 percent science and 80 percent art, but fundamentally if you are not making a profit on every sale, you need to review your costings and how you set your price.
4. What is my business worth?
While valuing a business is a project all of its own, your accountant should be able to give you an indicative valuation. Understanding what your business is worth is vital to making decisions about getting it ready for sale, retirement and succession.
And these three questions will lead to a whole lot more, like:
What can I do to increase sales?
How can I increase my profit?
How do I keep more cash in my business?
What do I need my business to be worth to fund my retirement?
Margaret Holmes is director at accounting/business coaching firm Engine Room