I recently had a meeting with a business that had been doing very well but which had seen a 40% decline in turnover. When I asked about costs the owner produced accounts from 2007-08. She was working to the same costs as two years ago, even though they had fallen because she was selling less.
Understanding your breakeven point, average deal and monthly targets can allow you to work out what you need to be doing on a daily basis. That gives you flexibility to do deals that you wouldn't do before and stop ones that shouldn't be done.
When I work out my breakeven point I include all costs, including my own dividend, VAT, corporation tax and national insurance. One company I work with say they hate the fact that I make them save for VAT and corporation tax because it reduces cashflow. It may reduce cashflow but it doesn't set a false economy. These are the basics you should know before you set up a business.
The best way to extract financial data is to use bank statements. I do a spreadsheet on everything that went out over the last three months and then an average because that's when you start to see patterns. I always aim to have no more than 12 direct debits going out and if I don't know what something is, I cancel it.
Understanding the financials also puts you in a far better position when negotiating with customers
Understanding the financials also puts you in a far better position when negotiating with customers. I'm working with a distribution business that has been affected by the 2p increase in fuel that came into force in April. They had customers trying to drive down prices but were able to say that by keeping them as they were they were effectively already giving a discount. Without knowing that, they would have given a discount without realising the effect it would have on the bottom line.
Not knowing your breakeven point risks you being a busy fool. If the price is too low, I'll say that I just can't do it. Some of the best deals I've done have been the ones I've never done at all.
There are other ways to reduce costs too. I have put a complete stop on any spending in one of my businesses without either my or the financial director's approval. I've also had every single premise I have re-evaluated for business rates. One property in a city centre was last assessed six years ago and the rates have changed so I got that down.
Speak to every supplier to see if you have the best commercial deal. If you're not calling them you can guarantee your competitor is. You should negotiate every single deal once a quarter, even if you only signed a contract a few months ago.
But some companies are cutting back on the wrong things. One in 20 small businesses is cancelling insurance policies but they're absolutely essential. I've seen businesses go into administration because they haven't got adequate insurance and someone's made a claim.
Recessions can be good for businesses because it makes them take stock of what's going on. You can forgive someone taking their eye off the ball if they're busy with sales coming in through the door. But in the current climate there's no excuse for not knowing every last financial detail.