Reading your business’s Statement of Profit and Loss

 

The Statement of Profit and Loss (also known as P/L) summarizes the revenues, costs and expenses incurred during a specific period of time, usually a fiscal quarter or year. It is one of the four main financial statements, the other three being the Statement of Financial Position (Balance Sheet), Statement of Cash Flow and Statement of Changes in Equity. The P/L is important because it helps a business owner to evaluate the performance of his/ her business and provides a basis for forecasting future performance.

Most owners tend to only look at the bottom line and fail to do much with the P/L beyond that. This article provides you some tips on how to read a P/L just like an accountant would so that you can make sound financial decisions based on that. A monthly review of your P/L would prove to be invaluable and it doesn’t have to take a lot of time if you have the right tools available.

Overview

Every P/L comprises of 4 main components namely,

• Sales – The revenue generated through the sale of the company’s goods or servies

• Cost of Goods Sold- The direct cost of producing the goods or services sold by the company, such as materials and labor.

• Expenses – The indirect costs incurred by the business to generate revenue such as salary cost, administration expenses

• Net profit/ loss – The net revenue remaining after paying off all expenses incurred by the business.

The P/L can be used by business owners to,

1. Carry out a month month-on-month or year-on-year analysis
2. Calculate Key Performance Indicators (KPIs)/ metrics
3. Compare metrics against industry benchmarks/ competitors

1. Carry out a month-on-month-on-month or year-on-year analysis

Do a comparison for each line in the P/L with the figures of the previous month/ year. Any significant variances such as an unanticipated increase in costs or reduction in revenue need to be investigated to identify the root cause. Look ahead to what the next steps are based on those results and if any adjustments should be made. You may have to dive deeper into your costs to find ways to bring it down in order to see planned results.

2. Calculate Key Performance Indicators (KPIs)

You can calculate metrics to track how well the company has performed. Some of the metrics that you can use are listed out below,

• Gross Profit margin= Gross Profit/ Sales
This ratio shows how much of your sales is profit after considering direct costs

• Net Profit Margin= Net Profit/ Sales
This ratio shows how much of your sales is profit after considering direct and indirect costs

• Return on equity= Net Profit/ Equity
Shows the return the owner has made on the capital invested

3. Compare metrics against industry benchmarks/ competitors

Once you have calculated the KPIs for your business, you can compare against industry benchmarks or competitor metrics if the data is available. If your metrics are close to the industry benchmarks that would indicate your company performance is on par with similar companies in the industry. Industry benchmarks can be obtained through research agencies that specialize in providing insights on industry performance.

Written by Zara, ACMA,CGMA, BBA(Accountancy & Finance). Zara is a Finance and Commercial Executive at SandS Australia. She has 4+ years’ experience in Auditing, Finance and Accounting which helps her drive business growth.

Edited by Sam Mansoor. Chartered Management Accountant, CPA, Chartered Global Management Accountant, Dip. Equity Trading. He has over 30 years’ experience helping businesses achieve immediate and long-term success.

Do you use your platforms (available resources) effectively? Read this article for support on Supply Chain SMEs

Continuous evolution has become the norm today. Similar to other businesses, Supply Chain Organisations have been through series of challenges and disruptions. The ways of the past century will not position you as a supply chain leader in this century. While there is immense pressure to survive in the supply chain market, with low margins and high competition; it is important understand and exploit these problems to convert them into opportunities. Your business could be facing challenges in one or in multiple areas in the supply chain. However, you have to sustain supply to customers without interruption. It is not the scale of your operation, but the management processes what makes the difference in success of the business.

What does it take to be a future-ready, high yielding supply chain business? Considering resource utilization (platforms) is vital in finding a solution to this.

One of our clients in the supply chain approached us to obtain assistance in improving the speed and cost to improve their bottom line. We analyzed their entire process, and our resultants were able understand and remove non-value add steps, identify and utilize internal resources that were not at full capacity. We improved their bottom line by 20% within two months of implementing these improvements.

Supply chain organization must use their platforms (available resources) to perform well in the industry. This can be categorized under three main areas;

1) Business as a service

2) Communication

3) Technical expertise

1). Business as a service – This mentality helps you to look at the entire spectrum of the business;

Business owners in Supply Chain Organisations should consider that they are in the service industry; this enables you to exploit shift changes in the industry and utilize resources at full potential. This includes shipping containers, vehicles, machinery and storage space. Revisit your storage mechanism to minimize the storage cost. This might require you to redesign certain products and packaging. Evaluate the resources available and their contribution to the delivery process.

SandS can assist you to understand correlation between resourse utilization and service delivery. We can also collaborate with you to implement an effective resource utilization plan

2). Communication and networking – Use your network to manage and expand end to end service delivery;

Communication and networking should be a key component in any business. Specially in the Supply Chain industry, you should have a connection between your customer portfolio, third party suppliers and vendors. This enables the business to stay connected, manage, and act on opportunities swiftly.

SandS resultants can assist you to create powerful communication platform connecting all your stakeholders to create a more profitable end-to-end Supply Chain process.

3). Technical Expertise – A method to leverage on knowledge, cost, time and quality

Outsourcing gives businesses access to technical expertise and operational maturity without requiring investment in capital-intensive assets and fixed overheads. Supply chain processes have many tasks that can be outsourced to improve performance and reduce costs. Finance & accounting activities, customer call centre and vendor coordination are few of the examples. In the next five years, it is expected that the most successful and profitable companies will be those that outsource middle office functions to optimise their supply chains end-to-end.

SandS can assist to identify the processes that qualify for outsourcing skilled taskforces to complete the work.

Written by Nara, ACMA, CGMA (CIMA-UK), MBA (ICFAI University). Nara is a Commercial Accountant at SandS Australia. She has 15 years of experience in business, finance and accounting in senior managerial roles helping analyse, identify, and drive business growth

Edited by Sam Mansoor. Chartered Management Accountant, CPA, Chartered Global Management Accountant, Dip. Equity Trading. He has over 30 years’ experience helping businesses achieve immediate and long-term success.

How to become environmentally sustainable

Sustainability refers to “the quality of not being harmful to the environment or depleting natural resources, and thereby supporting long-term ecological balance.” It should not be solely restricted to large corporates, small businesses need to embrace it as it’s a factor that influences consumer’s buying decision. Consumers are more willing than ever to purchase environmentally friendly brands.

By becoming more sustainable, businesses can increase their bottom line, as the focus on utilizing fewer resources would mean cost would be lower. Not only does going green improve the bottom-line, it also boosts the company’s image. This makes it easier to secure new customers and even investors.

In your journey towards becoming a sustainable company, it is important that you start by taking small steps. We have listed out a few tips to kick start you sustainability journey, which would not require a huge investment.

1. Aim to be paperless

Although it may not be possible to be 100% paperless, there are areas where you could shift to paperless operations such as in billing customers. Documents can be stored in cloud storage platforms where users can access it from anywhere in the world, which reduces the need to manually store the document. The business would also be able to save on storage costs. Where there is a need to use paper, the business can opt for recycled paper which again reduces the company’s environmental impact.

Our clients who have opted for paperless invoicing, have benefited from faster payments, easy storage as the invoices can be saved digitally and also easy retrieval of invoices should the need arise.

2. Involve your employees

Commitment to sustainability needs to be ingrained to company culture. This would be only possible if the top management shows a genuine interest in going green which will in turn send a clear message to the employees. Employees could be encouraged to share their ideas on sustainability practices that the organization can adopt.

Initiatives like bike to work day, carpooling, recycling programs can be launched which will help reduce the company’s carbon footprint.

3. Conserve electricity

Encourage employees to switch off lighting, air conditioning and heating when not in use. It may be worthwhile investing in motion sensor lights which help save power and also electricity costs. Where possible make use of natural lighting available and switch off light bulbs. Employees should be encouraged to shut down their computers at the end of the day.

Written by Zara, ACMA,CGMA, BBA(Accountancy & Finance). Zara is a Finance and Commercial Executive at SandS Australia. She has 4+ years’ experience in Auditing, Finance and Accounting which helps her drive business growth.

Edited by Sam Mansoor. Chartered Management Accountant, CPA, Chartered Global Management Accountant, Dip. Equity Trading. He has over 30 years’ experience helping businesses achieve immediate and long-term success.

Strategic Purchasing can Improve Profits!

An organisation’s purchasing department plays an important role in supply chain management. Purchasing includes activities such as selecting suppliers, negotiating, administering contracts, placing orders, developing & maintaining a supplier base.

Purchasing cost has a direct impact to cost of goods sold and has a significant impact to profitability. At the same time strategic decisions of the organisation, product pricing structure and cost has a direct impact in formulating the purchasing process of the organisation. Hence purchasing has a direct impact with the strategy of the organisation and profitability.

Though many business owners think purchasing is a very direct process and does not need a plan or a strategic approach about it; they tend to revisit procurement only after incurring losses. This document explains suggestions on strategically managing the Purchasing function.

1. Purchasing function should be centralised

Even if you manage a small business let this function to be handled by a specific person or a team. This eliminates wastage and allows obtaining price reductions from the suppliers.

2. Plan Purchasing

Categorise your purchasing requirements based on priority and level of quality of the goods/ materials required. Start building a pool of suppliers which will eliminate dependency on one supplier. Maintain a policy to build relationships with suppliers with a long-term aspect. Arrange daily, weekly, fortnightly, monthly purchasing plans based on your production demand. There has to be rigid structure for approvals when bulk purchasing. It is also required to maintain different authority levels when the purchasing value changes.

3. Consider possibilities of outsourcing

Based on the gravity of the purchasing function in your organisation, you can consider outsourcing a certain percentage of the procurement process. Specialised outsourcing companies in supply chain industry will have more efficient ways of negotiating compared to an individual organisation.

4. Purchasing should be based on real time demand

Purchasing quantity has to be based on real time demand. This will minimise wastage and storage cost. Demand calculation should be well planned and monitored. This can vary from organisation to organisation.

5. Impact on liquidity

Purchasing has an impact on working capital management of an organisation. It is important to ensure that the purchasing strategy does not have an adverse impact on the cash balance of the company. There has to be constant negotiations with suppliers to enjoy maximum credit period / commission.

Written by Nara, ACMA, CGMA (CIMA-UK), MBA (ICFAI University). Nara is a Commercial Accountant at SandS Australia. She has 15 years of experience in business, finance and accounting in senior managerial roles helping analyse, identify, and drive business growth

Edited by Sam Mansoor. Chartered Management Accountant, CPA, Chartered Global Management Accountant, Dip. Equity Trading. He has over 30 years’ experience helping businesses achieve immediate and long-term success.

Payroll Management tips for SMEs

Payroll management refers to managing employee’s financial records. This would cover salaries, allowances, deductions, and bonuses etc. Payroll management is undoubtedly one of the crucial processes involved in running your business. It directly affects the morale of your employees, so any delays or errors might result in employee dissatisfaction and ultimately you would lose your employees.

As a small business owner you may encounter several issues when managing payroll either manually or with the help of software. You would have to be up to date on changes to regulations failing which you would incur penalties. When payroll is processed manually it ends up taking a lot of time. Manual payroll processing is also more prone to errors.

Outlined below are some payroll management best practices that would ensure the payroll process at your organization is efficiently managed.

1. Consider automating the payroll process

If you are currently maintaining payroll records manually, consider automating the process with the help of payroll management software. Most payroll software options are integrated so you would be able to link it to your other business software such as the time tracking software and accounting applications.

2. Ensure you process the payroll on time

Once you have decided on the pay frequency i.e. weekly, fortnightly, monthly, set up a payroll calendar with the dates you need to complete the various tasks involved. This would involve setting deadlines for collecting time sheets, running the payroll and finally paying your employees. It is important that you keep your employees aware of the pay calendar so that there is no confusion.

3. Protect your payroll related data

Sensitive data such as banking details of your employees need to be protected. Any physical copies of payroll related information need to be securely locked up at all times with access provided to only authorised personnel. If there is any sensitive information that needs to be disposed, it needs to be done in such a manner so that no third party is able to access the sensitive data. For instance uncollected pay slips should be shredded prior to disposing the same.

4. Get professional help if required

As an owner managing a small business, payroll management may not exactly be your strength. It may be worthwhile handing over the reins to an expert in the field which would free up your time, allowing you to focus more on your business strategy.

Written by Zara, ACMA,CGMA, BBA(Accountancy & Finance). Zara is a Finance and Commercial Executive at SandS Australia. She has 4+ years’ experience in Auditing, Finance and Accounting which helps her drive business growth.

Edited by Sam Mansoor. Chartered Management Accountant, CPA, Chartered Global Management Accountant, Dip. Equity Trading. He has over 30 years’ experience helping businesses achieve immediate and long-term success.