Small business owners are frequently totally involved in every business activity on a day to day basis. Such close hands on involvement has major advantages although not taking time out to focus on the factors affecting business profitability both as a whole and in detail can result in the profit performance being lower than is achievable.
An essential first step to improving profitability is to step back from the day to day business and analyse the activities and financial accounts from a third party perspective. Accurate and up to date accounting records are a prerequisite to the options available since the accounting records place a value on the trading history.
If financial records are not up to date the next step would be update the financial accounts by either manually recording the transactions or using accounting software to produce the financial accounts. For small businesses this is often a problem as accounts are often left until the last minute and produced for tax purposes. Simple bookkeeping spreadsheets are adequate for many small businesses while medium sized businesses may adopt more sophisticated accounting software packages.
List the strengths and weaknesses of the business examining each activity from sales and purchasing, running costs, employees and financial control. Use the financial accounts to place values on the different business activity areas. This list should be as detailed and extensive as possible as it is through this listing that plans of action will be developed and emerge as a business plan.
Particular areas to consider would be past and present sales turnover being sub divided into product areas, sales volume and selling prices. Costs analysed by type and separated into direct purchasing costs, operating expenses and fixed overhead costs such as rent and premises costs.
The business assets and liabilities is another important area. List the main business fixed assets and the relevance and importance to the business. Working capital being the difference between the liquid assets such as cash, bank account balances, stock and debtors and the liquid liabilities such as creditors, bank overdrafts, loans and credit agreements.
Having analysed the activity and financial areas of the small business and listed the strengths and weaknesses the real work can begin to examine and review each area to determine how each of the historical financial figures produced from the accounts to accompany the review can be changed to form part of the future financial business plan.
And that is the ultimate target this exercise is being carried out to achieve, a serious business plan for the future. A business plan might be produced in the form of a financial accounting budget against which the planned action can be monitored to achieve the target objectives.
Review sales turnover by determining both the sales volume of existing products, associated products and new product areas that might be introduced. Examine selling prices and the relationship with major clients and how additional important clients can be added. From the analysis produce a sales plan to improve the sales volume preferably targeted at those products and product groups which will produce the highest gross margins.
Sales channels are important and while several sales channels will already exist they may not have been fully exploited in the past. Examine the strengths and weaknesses of each existing sales channel and other potential sales channels.
Other areas to consider are the selling prices and whether selected price increases can be achieved and the effect more competitive pricing might have to increase volume. A review of existing customers may identify areas where increased sales can be achievable than increasing sales volume to lower value clients.
Cost management is an obvious important area. Examine the supplier base and whether better or cheaper suppliers are available including shopping outside the existing geographical area including importing products. The majority of small businesses and large businesses can always drive purchasing costs lower.
The cost management review should include going through each cost component and determining if maximum use is being made of the services those costs are providing to the business. Are premises being fully utilised, could storage be improved, are the best heating and power options being exploited.
Businesses that employ staff have a whole raft of areas to consider. Motivation and cost are management are important as usually highly significant cost bases and areas which may indicate improved productivity levels, directing staff resources to the most profitable areas and the level of staffing and reducing waste through idle time also being considerations.
Alternate staffing options might be considered particularly if volumes are variable. Permanent staff levels are a fixed cost while employing temporary staff or outsourcing services become variable costs and can be used effectively to reduce overall costs.
Financing costs should be considered and the finance policy generally reviewed. Paying high market rates using credit cards is a poor cost option and any small business funding operations in this way should consider producing a business plan to use to obtain cheaper funding.
If working capital is a problem and holding back growth and opportunities then alternative financing of assets such as leasing and hire purchase agreements may be useful if the funds released can be used more effectively. External financing costs real money in interest payments and should be viewed against the additional profit that can be generated through improved liquidity and cash flow to boost the working capital.
Following a full review the management action to be taken should be listed and evaluated financially. Produce a financial budget forecast of the business plan supported by statements of actions to be taken to improve profitability. On a regular basis review the progress and its effect on profitability which may require adjustments as time passes to exploit new opportunities or revise exist plans.