Wealth Check

Accounting for growth

Annual accounts are such a chore. Corporation Tax to pay, Companies House deadlines to satisfy and if your turnover is big enough the burden of an audit to worry about. What's more, despite having worked harder and harder all year the accounts seem to indicate that very little profit has been made. As for the accountant, well you didn't understand a word he said.

I have always been suspicious that the huge amount of jargon involved in accounts is part of a conspiracy by accountants to stop everyone else understanding them Your end of year accounts ought to tell you three things about your business:

How profitable it is and why
How much it has grown
How the above two points affect its cash flow

Unfortunately, the various accounting standards and Companies Acts combine to hide these three points.

Profitability

"Business is simple", according to Al Dunlap the American business leader. There are normally only three elements that affect your profitability: your sales, the margins you make on those sales and your level of overheads. Unfortunately, annual accounts often don't even differentiate costs correctly and never express your margins in percentage terms.

It is then up to your accountant to interpret the figures that are there and highlight the reasons why your results are better or worse than you might have expected.

Growth

If growth is the answer, then it is crucial that you only focus on growth opportunities that are profitable. Too many businesses chase the wrong type of sales. As they say, turnover is vanity and profit is sanity.

Cash flow

For growing businesses, a healthy profit and loss account does not always represent a healthy bank balance. Profit is often tied up in working capital (debtors, stock and Work In Progress) or required for investment in capital equipment. Your accountant should be able to help you understand the relationship between profit and cash a little better. Many businesses suffer cash flow problems but do not know whether these are a result of poor profits or over-trading (when their business is too big for the finance available). Again, correct interpretation of your year-end accounts will help you understand this.

The future

Discussing your accounts with a professional will help you make the right decisions about the future of your business. Once you realise that end of year accounts aren't just about the tax bill you might find it is the best opportunity of the year to give the business some direction.