Wealth Check

Spotting trends

It is said that there are four stages to a business: new, growing, maturity and decline.

In the first two stages, each set of annual accounts might be barely recognisable from the previous years. Turnover is increasing as are overheads and new products and services can have dramatic effects not to mention the effects of the occasional bad decision.

Sooner or later though your business will reach stage three maturity. This is where the real money is to be made. Your customers hopefully trust you and you do not have the costs of an expensive learning curve to go through. Once there, it is up to its managers to keep it there as long as possible. If change is on the horizon and alterations need to be made, it is better to go back to the growth stage than go into decline.

But how do you recognise the warning signs of decline? You might be aware of changes in your industry but within your own business it is possible to be too close and not see problems that have built up over a number of years.

One way is to complete a trend analysis. A trend analysis will look at a set of accounting information over a long period. The trend analysis not only compares statistics from one year against the others but also compares the relationship between certain statistics e.g. growth against margins. Results can be produced in graphical form so that key personnel within the business can understand the issues involved.

This all sounds very nice but what will it tell us? On their own graphs will sometimes tell you of problem areas such as margins falling or bad debts increasing. It is the consultation process that goes with it that will help you determine the true causes of some of the statistics. Have stock losses arisen in the same period that staff turnover is high?

Analysis does not have to be just inward looking, either. For a small extra cost there are a variety of benchmarking reports available in any industry. Benchmarking involves comparing your business against other similar companies. You could compare yourself against the industry generally or just against one particular competitor. Most medium-sized and large companies use benchmarking as one of the main tools in their armour to ensure they stay competitive.

We can provide a 5 or 2-year trend analysis as part of your annual accounting process.