is Your Business Lumpy? Is it Going Downhill?

Sydney Outsourced CFO Thomas Taylor - Sunday, May 21, 2017

Is your business really lumpy? Or is it just the accounts? And if so, is it, beneath all that distortion, having problems? How do you find out?

Most businesses are much less lumpy than the monthly accounts usually show. That's because most businesses only have an accurate set of accounts once a year, and even then often done just for tax purposes which, as you can imagine, have their own set of rules.
 
If your income and expenses swing up and down a lot each month, it is more probable that your accounts are wrong. Unfortunately, businesses make very bad decisions, sometimes fatal ones, when they can't rely on their accounts and say things like "it's just a lumpy business".
 
The first thing to do is to look at your income: are your accounts really measuring what's been earned in that month or just what was billed? There is a big difference. For example, if you bill in November for work done in October, it should have been shown as income in your October accounts.
 
If you have work done that hasn't been billed it should be taken up as "work in progress". You've done the work. It's often good to take up a provision for write-downs but it's income nonetheless.
 
Next, look at your staff costs. If they vary by more than a few percent each month when your staff numbers are mostly stable, once again you have a problem with your books. Sometimes it's just the number of pay periods in a month differs: that’s easy to fix. The same goes for your overheads. They should be fairly stable month to month. Again, easy to fix.
 
Be very careful that all expenses have been taken up that you haven't been invoiced for yet. This can sometimes be substantial and distressing.
 
Finally look at any direct costs and see if they vary directly in proportion to your income.
 
You've probably heard of "accrual accounting". These types of adjustments change your accounts from "cash accounts" to "accrual accounts" and you should only ever gauge profitability on accrual accounts. Cash accounts are for managing cash flow.
 
Making decisions based on cash accounts can end up being fatal for your business if not addressed but, thankfully, it's very easy to fix.

 

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