By now your accountant should have logged your last Business Activity Statement and sent you your business’ year-end financial statements. Generally, you will receive two statements – the profit and loss (P&L) statement and the balance sheet. Take the time to thoroughly peruse these two documents; don’t just look at the bottom line of the P&L to see how much money you made. These statements can tell you a lot about your company – from its performance last year to the adjustments you will need to make this year.
Many companies have questions after examining their P&L and balance sheets. If you know what to look for and have the right questions to ask your accountant, you may be able to increase your profit and surpass last year. Take a look at the 7 questions to ask your accountant after year-end financial statements are distributed:
1. How did my business compare with competitors (or others in the industry)?
Don’t be afraid to ask your accountant to show you business benchmarks relevant to your industry. These are quick and easy ways to compare the performance of your business with the industry average. Is your company’s profit better than the industry average? Are you spending too much on wages or marketing? Business benchmarks will help you identify both the areas in which your business may need some work or in which it currently excels.
2. What is my business’ gross profit (gross margin) percentage?
Gross profit is the difference between the value of your sales and the actual cost of your sales. As a business owner or manager, it is crucial to understand this figure and what it means for your business. Consider the following formula used to calculate gross profit:
Gross Profit Percentage = Gross Profit ÷ Sales x 100%
To increase your gross profit margin, you must increase your selling price or reduce your cost of sales. After calculating your company’s percentage, ask yourself (and your accountant) what you can do to increase your gross profit margin in the next year.
3. How can I reduce my expenses without compromising quality or service?
This is actually a quite common question and in order to answer it, you have to know where your money is going. If you don’t know where exactly it is going, you will never know where to start controlling expenses. Take a close look at each expense and determine its importance. If the expense does not affect the way your business runs right now, then it can be reduced or eliminated completely.
4. What is my “breakeven” point?
Your “breakeven” point is the point at which your business makes neither a profit nor a loss. Knowing this point is critical to the success of your business, as it lets you know at what point you will begin making a profit. The breakeven point can be calculated for any period of time, be it yearly, quarterly, monthly, weekly or daily.
5. Which of my products and services are making me the most profit?
Take a look at the profit margin of each product and service your company provides. Keep the products and services that are giving you the highest return for the least effort and discontinue the products and services that have a low profit margin and take more effort to provide.
6. How can I improve my cashflow?
A surefire way of improving your cashflow is to examine how long it takes your customers to pay you for your products and services. Make it a mission to collect your money on time; after all, it is rightfully yours! Make sure that your customers are aware of your company’s payment terms and designate a short amount of time each week to personally contact clients whose accounts are due.
7. In its current financial position, will my business be able to survive an economic decline?
As you know, the economy affects your business directly. Is your company in a strong enough position to weather a tough economic storm? Ask your accountant about your debt to equity ratio (the proportion of the capital invested by the business owner to the funds provided by external lenders). This ratio gives a comparison of how much of the business was financed by the owner’s equity and how much was financed through debt. An acceptable debt to equity ratio is generally within the range of 1:1 to 4:1 (i.e. a maximum of $4 debt for $1 of equity); however, it will ultimately depend on the individual business and industry circumstances.
Too much debt could put your business at risk, and too little debt could mean that you are not taking advantage of crucial opportunities and allowing your business to reach its potential growth.