Producing financial accounts may well be an administrative headache for a small business and many self employed businesses put off this essential business and reduce it to an annual event. There are major benefits that small business can derive from operating the financial system as an important part of the business management.
Big business invests millions in sophisticated accounting software and financial control systems because financial management is seen as a key to financial success. Many small business organisations ignores these benefits relying instead on personal knowledge and in some cases not even that.
Why would a large business that is focused entirely on the bottom line and growing that bottom line invest in bookkeepers, accounts clerks, accountants, credit controllers, cost controllers, financial directors and accounting software? The answer is simple. Detailed strong disciplined financial control is essential to protecting the financial health of the business and providing the financial framework to produce higher profit growth year after year.
All business functions are important for business success. Sales and marketing provide the growth opportunities and production and operating activities produce the goods to supply that demand but the finance function delivers the framework and analysis to grow the bottom line.
Regardless of whether a small business maintains a manual system of bookkeeping to record financial transactions or uses an accounting software package it is important that regular monthly accounts are prepared. And having prepared a set of financial accounts those accounting statements should be reviewed to grow the business.
By producing monthly accounts that show the sales turnover preferably analysed by product type or source of sales the effectiveness of the sales campaign is measured in real money. Such financial information is required to determine where future sales and marketing efforts are required to improve or discontinue a failing program or capitalise on a successful program. Without measuring and analysing sales performance management action becomes a guess game based upon intuition rather than hard financial facts.
Accounting software produces a gross profit margin the business is earning on its products. A small business when presented with the profit percentages can make decisions to increase sales prices where possible to increase the profit or reduce cost of sales as appropriate. The gross profit margin is vital to the business finances and analysing the margin to identify areas where it can be increased can significantly improve profit performance.
A monthly profit and loss account would show the level of expenditure in running the business. Reviewing the monthly trends produced by the accounting software will often show some categories of expenses going up and some going down. Critical review of costs can maintain financial control and improve the financial performance.
A critical financial feature of business is the level of gross profit margin in both percentage terms and volume compared with the level of fixed expenses. By using accounting software to produce a monthly profit and loss account the business management can immediately see and understand if that gross profit is sufficient. Action should follow.
That is the benefit of accounting software, the production of actual financial figures that indicate where and how much action needs to be taken to improve the net profit earned.
That action may indicate a need to improve sales volume, increase the gross margin through higher sales prices or lower direct costs or a reduction in overhead and business running costs.
Financial questions can be asked based upon the historical evidence of the financial figures produced in earlier months compared with the current position. Such questions may identify sales opportunities that are not being fully exploited, areas where gross profit margins can be improved and cost control over excess expenditure.
With the financial control and analysis that accounting software can provide a business financial performance can be improved and the bottom line increased.
