Business mentor: Health checks are way to sustain profits

Q. My new business is going reasonably well but what are the things I should be regularly monitoring to ensure it continues to do so? Small business sector specialist Sarah Trotman spoke to Paul Vlasic, NZ regional licensor for CAD Partners, to find out:

A. When setting up a new business, many owners spend a lot of time developing their financial strategic plan as part of their overall business plan. Then they get busy "doing business" and often don't revisit their business plan and financial goals. Over time, the profitability of a business can be eroded as costs increase.

Here is a helpful step-by-step process to keep your business healthy and profitable.

Simply take a recent statement on profit and loss, look at the line items and ask yourself the following questions:

Income/pricing

How is your price calculated?

Does it account for costs? Do you regularly increase prices or do you constantly absorb increased costs?

Income breakdown

Do you split income by product type/service type/region/division? It pays to know which are your most- and least-profitable areas.

Optimum sales volume

Many people say "maximum" is the same as "optimum". This is often not the case, especially where cashflow is concerned.

Cost of goods

Do you know how much more you have to sell to cover extra costs such as a new employee or income-producing equipment?

Stock

How do you manage stock? Do you know which lines are moving the quickest and slowest? Do you manage and dispose the obsolete? Purchases

Do you monitor purchasing and seek better terms from suppliers?

Gross profit

Do you know what your industry benchmark is? Do you measure your business this way?

Overheads

Do you regularly check the necessity of all items purchased? Thousands can be saved in unnecessary spending.

Once you become skilled at checking these areas of your profit-and-loss statement, you are ready to start exploring another essential report, your balance sheet.

The balance sheet

What it is

A snapshot of your company's assets and liabilities.

How you should use it

The balance sheet is typically created to coincide with your profit-and-loss statement because it complements your profit picture by providing a complete view of all assets and liabilities. A balance sheet provides a picture of what your equity in the business is worth.

How often you should refer to/create

Time its creation to coincide with your profit-and-loss statement.

* If you have more questions on how to keep your business in good financial health you can phone Paul Vlasic on (09) 379-1079 or 0800 180 400, or email paulv@cadpartners.biz